UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

   (X)   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the quarterly period ended September 30, 2004


                                       OR

   ( )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from            to
                                        -----------   -----------

                          Commission File Number 1-8864

                                 USG CORPORATION
- ------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Delaware                                    36-3329400
- ------------------------------------------------------------------------------
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)

 125 South Franklin Street, Chicago, Illinois              60606-4678
- ------------------------------------------------------------------------------
 (Address of principal executive offices)                  (Zip code)

Registrant's telephone number, including area code        (312) 606-4000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  [X]  No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X]  No [ ]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X]  No [ ]

As of September 30, 2004, 43,016,037 shares of USG common stock were
outstanding.



                                TABLE OF CONTENTS


                                                                                       Page
                                                                                       ----
                                                                                    
PART I  FINANCIAL INFORMATION

Item 1. Financial Statements:

        Consolidated Statements of Earnings:
             Three Months and Nine Months
             Ended September 30, 2004 and 2003                                           3

        Consolidated Balance Sheets:
             As of September 30, 2004 and December 31, 2003                              4

        Consolidated Statements of Cash Flows:
             Nine Months Ended September 30, 2004 and 2003                               5

        Notes to Consolidated Financial Statements                                       6

Item 2. Management's Discussion and Analysis of Results
           of Operations and Financial Condition                                        38

Item 4. Controls and Procedures                                                         51

Report of Independent Registered Public Accounting Firm                                 53

PART II  OTHER INFORMATION

Item 1. Legal Proceedings                                                               55

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                     55

Item 6. Exhibits                                                                        55

Signatures                                                                              56


                                      -2-


PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                 USG CORPORATION
                       CONSOLIDATED STATEMENTS OF EARNINGS
                   (DOLLARS IN MILLIONS EXCEPT PER-SHARE DATA)
                                   (UNAUDITED)



                                                THREE MONTHS                    NINE MONTHS
                                            ENDED SEPTEMBER 30,             ENDED SEPTEMBER 30,
                                      ----------------------------    ---------------------------
                                          2004            2003            2004            2003
                                      ------------    ------------    ------------    -----------
                                                                          
Net sales                             $      1,175    $        963    $      3,340    $      2,739
Cost of products sold                          941             816           2,719           2,341
Selling and administrative expenses             82              78             238             239
Chapter 11 reorganization expenses               4               2              10               7
                                      ------------    ------------    ------------    ------------
Operating profit                               148              67             373             152
Interest expense                                 2               2               4               5
Interest income                                 (2)             (1)             (4)             (3)
Other income, net                                -               -               3              (5)
                                      ------------    ------------    ------------    ------------
Earnings before income taxes and
  cumulative effect of accounting
  change                                       148              66             370             155
Income taxes                                    58              27             143              63
                                      ------------    ------------    ------------    ------------
Earnings before cumulative effect
  of accounting change                          90              39             227              92
                                      ------------    ------------    ------------    ------------
Cumulative effect of accounting
  change, net of tax                             -               -               -             (16)
                                      ------------    ------------    ------------    ------------
Net earnings                                    90              39             227              76
                                      ============    ============    ============    ============

EARNINGS PER COMMON SHARE:
  Basic and diluted before
    cumulative effect of accounting
    change                                    2.10            0.89            5.28            2.13

  Cumulative effect of accounting
    change                                       -               -               -           (0.37)
                                      ------------    ------------    ------------    ------------
  Basic and diluted                           2.10            0.89            5.28            1.75
                                      ============    ============    ============    ============
Dividends paid per common share                  -               -               -               -
Average common shares                   43,016,919      43,053,106      43,019,286      43,082,925
Average diluted common shares           43,018,186      43,054,141      43,020,448      43,082,925


See accompanying Notes to Consolidated Financial Statements.

                                      -3-


                                 USG CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)



                                                       AS OF           AS OF
                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        2004            2003
                                                    ------------    ------------
                                                              
ASSETS
Current Assets:
Cash and cash equivalents                           $        669    $        700
Short-term marketable securities                             129              64
Restricted cash                                               20               7
Receivables (net of reserves - $15 and $15)                  453             321
Inventories                                                  364             280
Income taxes receivable                                       20              26
Deferred income taxes                                         32              43
Other current assets                                          81              57
                                                    ------------    ------------
Total current assets                                       1,768           1,498

Long-term marketable securities                              258             176
Property, plant and equipment (net of accumulated
    depreciation and depletion - $892 and $816)            1,822           1,818
Deferred income taxes                                        135             178
Goodwill                                                      41              39
Other assets                                                 115              90
                                                    ------------    ------------
Total Assets                                               4,139           3,799
                                                    ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                             248             202
Accrued expenses                                             211             206
Current portion of long-term debt                              1               1
Income taxes payable                                          23               5
                                                    ------------    ------------
Total current liabilities                                    483             414

Long-term debt                                                 1               1
Deferred income taxes                                         23              23
Other liabilities                                            455             429
Liabilities subject to compromise                          2,239           2,243

Commitments and contingencies

Stockholders' Equity:
Preferred stock                                                -               -
Common stock                                                   5               5
Treasury stock                                              (258)           (258)
Capital received in excess of par value                      414             414
Accumulated other comprehensive income (loss)                 21              (1)
Retained earnings                                            756             529
                                                    ------------    ------------
Total stockholders' equity                                   938             689
                                                    ------------    ------------
Total Liabilities and Stockholders' Equity                 4,139           3,799
                                                    ============    ============


See accompanying Notes to Consolidated Financial Statements.

                                      -4-


                                 USG CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)



                                                            NINE MONTHS
                                                        ENDED SEPTEMBER 30,
                                                       ---------------------
                                                         2004         2003
                                                       ---------    ---------
                                                              
OPERATING ACTIVITIES:
Net earnings                                           $     227    $      76
Adjustments to reconcile net earnings to net cash:
   Cumulative effect of accounting change                      -           16
   Depreciation, depletion and amortization                   83           80
   Deferred income taxes                                      44           43
   (Gain) loss on asset dispositions                          (1)           -
   (Increase) decrease in working capital:
    Receivables                                             (132)         (86)
    Income taxes receivable                                    6           (4)
    Inventories                                              (84)          (9)
    Payables                                                  64           40
    Accrued expenses                                           5          (44)
(Increase) decrease in other assets                          (28)         (11)
Increase (decrease) in other liabilities                      16           38
Change in asbestos receivable                                 11           19
Decrease in liabilities subject to compromise                 (4)         (20)
Other, net                                                     4           (2)
                                                       ---------    ---------
Net cash provided by operating activities                    211          136
                                                       ---------    ---------
INVESTING ACTIVITIES:
Capital expenditures                                         (80)         (61)
Purchases of marketable securities                          (361)        (197)
Sales or maturities of marketable securities                 210          141
Net proceeds from asset dispositions                           6            1
Acquisition of business                                       (4)          (3)
                                                       ---------    ---------
Net cash used for investing activities                      (229)        (119)
                                                       ---------    ---------
FINANCING ACTIVITIES:
Deposit of restricted cash                                   (13)          (6)
                                                       ---------    ---------
Net cash used for financing activities                       (13)          (6)
                                                       ---------    ---------

Net (decrease) increase in cash and cash equivalents         (31)          11

Cash and cash equivalents at beginning of period             700          649
                                                       ---------    ---------
Cash and cash equivalents at end of period                   669          660
                                                       =========    =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid                                                  1            1
Income taxes paid, net                                        73           12


See accompanying Notes to Consolidated Financial Statements.

                                      -5-


                                 USG CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(1)   PREPARATION OF FINANCIAL STATEMENTS

      The accompanying unaudited consolidated financial statements of USG
      Corporation ("the Corporation") have been prepared in accordance with
      applicable United States Securities and Exchange Commission guidelines
      pertaining to interim financial information. The preparation of financial
      statements in conformity with accounting principles generally accepted in
      the United States of America requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities,
      revenues and expenses. Actual results could differ from those estimates.
      In the opinion of management, the financial statements reflect all
      adjustments, which are of a normal recurring nature, necessary for a fair
      presentation of the Corporation's financial results for the interim
      periods. These financial statements and notes are to be read in
      conjunction with the financial statements and notes included in the
      Corporation's 2003 Annual Report on Form 10-K which was filed on February
      24, 2004.

(2)   VOLUNTARY REORGANIZATION UNDER CHAPTER 11

      On June 25, 2001 (the "Petition Date"), the Corporation and the 10 United
      States subsidiaries listed below (collectively, the "Debtors") filed
      voluntary petitions for reorganization (the "Filing") under chapter 11 of
      the United States Bankruptcy Code (the "Bankruptcy Code") in the United
      States Bankruptcy Court for the District of Delaware (the "Bankruptcy
      Court"). This action was taken to resolve asbestos claims in a fair and
      equitable manner, to protect the long-term value of the Debtors'
      businesses, and to maintain the Debtors' leadership positions in their
      markets.

      The chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases")
      are being jointly administered as In re: USG Corporation et al. (Case No.
      01-2094). The Chapter 11 Cases do not include any of the Corporation's
      non-U.S. subsidiaries. The following subsidiaries filed chapter 11
      petitions: United States Gypsum Company ("U.S. Gypsum"); USG Interiors,
      Inc. ("USG Interiors"); USG Interiors International, Inc.; L&W Supply
      Corporation ("L&W Supply"); Beadex Manufacturing, LLC; B-R Pipeline
      Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
      Industries, Inc.; and USG Pipeline Company.

      The background of asbestos litigation, developments in the Corporation's
      reorganization proceedings and estimated cost are discussed in Note 13.
      Litigation.

                                      -6-


      CONSEQUENCES OF THE FILING

      As a consequence of the Filing, all asbestos lawsuits and other lawsuits
      pending against the Debtors as of the Petition Date are stayed, and no
      party may take any action to pursue or collect pre-petition claims except
      pursuant to an order of the Bankruptcy Court. Since the Filing, the
      Debtors have ceased making both cash payments and accruals with respect to
      asbestos lawsuits, including cash payments and accruals pursuant to
      settlements of asbestos lawsuits. The Debtors are operating their
      businesses without interruption as debtors-in-possession subject to the
      provisions of the Bankruptcy Code, and vendors are being paid for goods
      furnished and services provided after the Filing.

      The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald,
      a bankruptcy court judge, and to Judge Joy Flowers Conti, a district court
      judge. Three creditors' committees, one representing asbestos personal
      injury claimants, another representing asbestos property damage claimants,
      and a third representing unsecured creditors, were appointed as official
      committees in the Chapter 11 Cases. The Bankruptcy Court also appointed
      Dean M. Trafelet as the legal representative for future asbestos claimants
      in the Debtors' bankruptcy proceedings. Mr. Trafelet was formerly a judge
      of the Circuit Court of Cook County, Illinois. The appointed committees,
      together with Mr. Trafelet, will play significant roles in the Chapter 11
      Cases and resolution of the terms of any plan of reorganization.

      The Debtors intend to address their liability for all present and future
      asbestos claims, as well as all other pre-petition claims, in a plan or
      plans of reorganization approved by the Bankruptcy Court. The Debtors
      currently have the exclusive right to file a plan of reorganization until
      December 1, 2004. The Debtors may seek one or more additional extensions
      of the exclusivity period depending upon developments in the Chapter 11
      Cases.

      The plan of reorganization ultimately approved by the Bankruptcy Court in
      the Chapter 11 Cases may include one or more independently administered
      trusts under Section 524(g) of the Bankruptcy Code, which may be funded by
      the Debtors to allow payment of present and future asbestos personal
      injury claims. Under the Bankruptcy Code, a plan of reorganization
      creating a Section 524(g) trust may be confirmed only if 75% of the
      asbestos claimants who vote on the plan approve the plan. A plan of
      reorganization, including a plan creating a Section 524(g) trust, may be
      confirmed without the consent of non-asbestos creditors and equity
      security holders if certain requirements of the Bankruptcy Code are met.

      The Debtors also expect that the plan of reorganization will address the
      Debtors' liability for asbestos property damage claims, whether by
      including those liabilities in a Section 524(g) trust or by other means.

      If the confirmed plan of reorganization includes the creation and funding
      of a Section 524(g) trust, the Bankruptcy Court will issue a permanent
      injunction barring the assertion of present and future asbestos claims

                                      -7-


      against the Debtors, their successors, and their affiliates, and
      channeling those claims to the trust for payment in whole or in part.

      Similar plans of reorganization containing Section 524(g) trusts have been
      confirmed in the chapter 11 cases of other companies with asbestos
      liabilities, but there is no guarantee that the Bankruptcy Court in the
      Debtors' Chapter 11 Cases will approve creation of a Section 524(g) trust
      or issue a permanent injunction channeling to the trust all asbestos
      claims against the Debtors and/or their successors and affiliates. In
      addition, if federal legislation addressing asbestos personal injury
      claims is passed, which is extremely unpredictable at this time, such
      legislation may affect the amount that will be required to resolve the
      Debtors' asbestos personal injury liability in the Chapter 11 Cases and
      may affect whether the Debtors establish a trust under Section 524(g). See
      Potential Federal Legislation Regarding Asbestos Personal Injury Claims,
      below.

      A key factor in determining the recovery of pre-petition creditors and
      stockholders under any plan of reorganization is the amount that must be
      provided in the plan to resolve the Debtors' liability for present and
      future asbestos claims. Counsel for the Official Committee of Asbestos
      Personal Injury Claimants and counsel for the legal representative for
      future asbestos personal injury claimants have stated that the Debtors'
      liabilities for present and future asbestos claims exceed the value of the
      Debtors' assets and that the Debtors are insolvent. The Debtors have
      stated that they believe they are solvent if their asbestos liabilities
      are fairly and appropriately valued. See Note 13. Litigation, for
      additional information regarding Debtors' asbestos liabilities and their
      estimated cost.

      The Debtors' asbestos liabilities to be funded under a plan of
      reorganization have not yet been determined and are subject to substantial
      dispute and uncertainty. While it is the Debtors' intention to seek a full
      recovery for their creditors, it is not possible to predict the amount
      that will have to be provided in the plan of reorganization to resolve
      present and future asbestos claims, how the plan of reorganization will
      treat other pre-petition claims, whether there will be sufficient assets
      to satisfy the Debtors' pre-petition liabilities, and what impact any plan
      may have on the value of the shares of the Corporation's common stock and
      other outstanding securities. The payment rights and other entitlements of
      pre-petition creditors and the Corporation's stockholders may be
      substantially altered by any plan of reorganization confirmed in the
      Chapter 11 Cases. Pre-petition creditors may receive under the plan of
      reorganization less than 100% of the face value of their claims, the
      pre-petition creditors of some Debtors may be treated differently from the
      pre-petition creditors of other Debtors, and the interests of the
      Corporation's stockholders are likely to be substantially diluted or
      cancelled in whole or in part. There can be no assurance as to the value
      of any distributions that might be made under any plan of reorganization
      with respect to such pre-petition claims, or equity interests.

                                      -8-


      It is also not possible to predict how the plan of reorganization will
      treat intercompany indebtedness, licenses, transfers of goods and
      services, and other intercompany arrangements, transactions and
      relationships that were entered into before the Petition Date. These
      arrangements, transactions and relationships may be challenged by various
      parties in the Chapter 11 Cases, and the outcome of those challenges, if
      any, may have an impact on the treatment of various claims under any plan
      of reorganization.

      In connection with the Filing, the Corporation implemented a Bankruptcy
      Court-approved key employee retention plan that commenced on July 1, 2001,
      and continued until June 30, 2004. Effective July 1, 2004, the key
      employee retention plan, in an amended form, was extended until December
      31, 2005. Under the amended plan, participants continue to earn awards
      semi-annually. The amendments introduce a performance feature for the last
      two (of four) payments to be made under the extended plan. The cost of the
      extended plan is projected to be approximately $9.8 million during the
      second half of 2004 and $19.6 million for the full year 2005 before taking
      into account the performance feature which could increase the final two
      payments up to 25% or eliminate them altogether. Because of the
      performance feature, expense in 2005 could range from a low of
      approximately $7.0 million (assuming failure to meet the performance
      target which would result in the final two payments being eliminated) to a
      maximum of approximately $22.7 million (assuming full attainment of the
      performance target).

      Total expenses, including related benefits, for key employee retention
      under the amended and/or original plans amounted to $6.2 million in the
      third quarter of 2004 and $11.5 million in the first nine months of 2004.
      For the respective 2003 periods, these expenses amounted to $5.9 million
      and $17.1 million. Expense in the first nine months of 2004 declined from
      the level in 2003 primarily due to the accrual in 2003 of deferred amounts
      that were paid in 2004.

      POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS

      The Corporation has for many years actively supported proposals for
      federal legislation addressing asbestos personal injury claims. On April
      7, 2004, the Fairness in Asbestos Injury Resolution Act of 2004 (Senate
      Bill 2290, the "FAIR Bill") was introduced in the United States Senate.
      The FAIR Bill has not been approved by the Senate, has not been introduced
      in the House of Representatives, and is not law.

      The FAIR Bill introduced in the Senate is intended to establish a
      nationally administered trust fund to compensate asbestos personal injury
      claimants. In the FAIR Bill's current form, companies that have made past
      payments for asbestos personal injury claims would be required to
      contribute amounts to a national trust fund on a periodic basis that would
      pay the claims of qualifying asbestos personal injury claimants. The
      nationally administered trust fund would be the exclusive remedy for
      asbestos personal injury claims, and such claims could not be brought in

                                      -9-


      state or federal court as long as such claims are being compensated under
      the national trust fund.

      In the FAIR Bill's current form, the amounts to be paid to the national
      trust fund are based on an allocation methodology set forth in the FAIR
      Bill. The amounts that participants, including the Debtors, would be
      required to pay are not dischargeable in a bankruptcy proceeding. The FAIR
      Bill also provides, among other things, that the national trust fund shall
      cease paying new claims if it is determined that the money in the fund is
      not sufficient to compensate eligible claimants. In such a case, under the
      terms of the current FAIR Bill, the claimants and defendants would return
      to the federal court system to resolve claims not paid by the national
      trust fund.

      Enactment of the FAIR Bill or similar legislation addressing the financial
      contributions of the Debtors for asbestos personal injury claims would
      have a material impact on the amount of the Debtors' asbestos personal
      injury liability and Debtors' Chapter 11 Cases.

      The outcome of the legislative process, however, is inherently
      speculative, and it cannot be known whether the FAIR Bill or similar
      legislation will ever be enacted or, even if enacted, what the terms of
      the final legislation might be. Many labor organizations, including the
      AFL-CIO, as well as some Senators, have indicated that they oppose the
      FAIR Bill as introduced because, among other things, they believe that the
      FAIR Bill does not provide sufficient compensation to asbestos claimants.
      On April 22, 2004, the Senate defeated a motion to proceed with floor
      consideration of the FAIR Bill. Discussions continue regarding possible
      revisions to the FAIR Bill that would allow it to move forward, but it is
      unclear whether these discussions will produce agreements on key issues.
      It is likely that, even if the FAIR Bill is enacted, the terms of the
      enacted legislation will be different from the current FAIR Bill, and
      those differences may be material to the FAIR Bill's impact on the
      Corporation.

      During the legislative process, proceedings in the Chapter 11 Cases will
      continue. See Consequences of the Filing, above, and Note 13. Litigation.

      PRE-PETITION LIABILITIES OTHER THAN ASBESTOS-RELATED CLAIMS

      Subsequent to the Filing, the Debtors received approval from the
      Bankruptcy Court to pay or otherwise honor certain of their pre-petition
      obligations, including employee wages, salaries, benefits and other
      employee obligations, and from limited available funds, pre-petition
      claims of certain critical vendors, real estate taxes, environmental
      obligations, certain customer programs and warranty claims, and certain
      other pre-petition claims.

      Pursuant to the Bankruptcy Code, schedules were filed by the Debtors with
      the Bankruptcy Court on October 23, 2001, and certain of the schedules
      were amended on May 31, 2002, December 13, 2002, and September 30, 2004

                                      -10-


      setting forth the assets and liabilities of the Debtors as of the date of
      the Filing. The Bankruptcy Court established a bar date of January 15,
      2003, by which proofs of claim were required to be filed against the
      Debtors for all claims other than asbestos-related personal injury claims
      as defined in the Bankruptcy Court's order.

      Approximately 5,000 proofs of claim for general unsecured creditors
      (including pre-petition debtholders and contingent claims, but excluding
      asbestos-related claims), totaling approximately $8.7 billion were filed
      by the bar date. Of this amount, $5.7 billion worth of claims have been
      withdrawn from the case by creditors. The Debtors have been analyzing the
      remaining proofs of claim and determined that many of them are duplicates
      of other proofs of claim or of liabilities previously scheduled by the
      Debtors. In addition, many claims were filed against multiple Debtors or
      against an incorrect Debtor, or were incorrectly claiming a priority level
      higher than general unsecured or an incorrect dollar amount. To date, the
      court has expunged 264 claims totaling $29.5 million as duplicates;
      expunged 429 claims totaling $198.8 million as amended or superceded;
      allowed the reduction of 636 claims by a total of $8.2 million; and
      allowed the correction of the Debtors on 1,281 claims and the
      reclassification of 258 claims to general unsecured claims. The Debtors
      continue to analyze and reconcile filed claims on an ongoing basis.

      The deadline to bring avoidance actions in the Chapter 11 Cases was June
      25, 2003. Avoidance actions could include claims to avoid alleged
      preferences made during the 90-day period prior to the filing (or one-year
      period for insiders) and other transfers made or obligations incurred
      which could be alleged to be constructive or actual fraudulent conveyances
      under applicable law. Effective prior to the avoidance action deadline,
      the Bankruptcy Court granted the motion of the committee representing the
      unsecured creditors to file a complaint seeking to avoid and recover as
      preferences certain pre-petition payments made by the Debtors to 206
      creditors, where such payments, in most cases, exceeded $500,000. The
      Bankruptcy Court also granted the committee's request to extend the time
      by which the summonses and complaints are served upon each named defendant
      until 90 days after confirmation of a plan of reorganization filed in
      connection with the Chapter 11 Cases.

      In addition, prior to the deadline for filing avoidance actions, certain
      of the Debtors entered into a Tolling Agreement pursuant to which the
      Debtors voluntarily agreed to extend the time during which actions could
      be brought to avoid certain intercompany transactions that occurred during
      the one-year period prior to the filing of the Chapter 11 Cases. The
      transactions as to which the Tolling Agreement applies are the creation of
      liens on certain assets of Debtor subsidiaries in favor of the Corporation
      in connection with intercompany loan agreements; a transfer by U.S. Gypsum
      to the Corporation of a 9% interest in the equity of CGC Inc., the
      principal Canadian subsidiary of the Corporation; and transfers made by
      the Corporation to USG Foreign Investments, Ltd., a non-Debtor subsidiary.
      The Bankruptcy Court approved the Tolling Agreement in June 2003.

                                      -11-


      The Debtors expect to address claims for general unsecured creditors
      through liquidation, estimation or disallowance of the claims. In
      connection with this process, the Debtors will make adjustments to their
      schedules and financial statements as appropriate. Any such adjustments
      could be material to the Corporation's consolidated financial position,
      cash flows and results of operations in any given period. At this time, it
      is not possible to estimate the Debtors' liability for these claims.
      However, it is likely that the Debtors' liability for these claims will be
      different from the amounts now recorded by the Debtors. Proofs of claim
      alleging asbestos property damage claims are discussed in Note 13.
      Litigation under Developments in the Reorganization Proceedings.

      FINANCIAL STATEMENT PRESENTATION

      The accompanying consolidated financial statements have been prepared in
      accordance with American Institute of Certified Public Accountants
      ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
      Entities in Reorganization Under the Bankruptcy Code," and on a
      going-concern basis, which contemplates continuity of operations,
      realization of assets and liquidation of liabilities in the ordinary
      course of business. However, as a result of the Filing, such realization
      of assets and liquidation of liabilities, without substantial adjustments
      and/or changes of ownership, are subject to uncertainty. Given this
      uncertainty, there is substantial doubt about the Corporation's ability to
      continue as a going concern. Such doubt includes, but is not limited to, a
      possible change in control of the Corporation, as well as a potential
      change in the composition of the Corporation's business portfolio. The
      financial statements do not include any adjustments that might result from
      the outcome of this uncertainty. While operating as debtors-in-possession
      under the protection of chapter 11 of the Bankruptcy Code and subject to
      Bankruptcy Court approval or otherwise as permitted in the ordinary course
      of business, the Debtors, or any of them, may sell or otherwise dispose of
      assets and liquidate or settle liabilities for amounts other than those
      reflected in the consolidated financial statements. Further, a plan of
      reorganization could materially change the amounts and classifications in
      the historical consolidated financial statements.

      The Corporation's ability to continue as a going concern is dependent
      upon, among other things, (i) the ability of the Corporation to maintain
      adequate cash on hand, (ii) the ability of the Corporation to generate
      cash from operations, (iii) confirmation of a plan of reorganization under
      the Bankruptcy Code and (iv) the Corporation's ability to be profitable
      following such confirmation. The Corporation believes that cash and
      marketable securities on hand and future cash available from operations
      will provide sufficient liquidity to allow its businesses to operate in
      the normal course without interruption for the duration of the chapter 11
      proceedings. This includes its ability to meet post-petition obligations
      of the Debtors and to meet obligations of the non-Debtor subsidiaries.

                                      -12-


      LIABILITIES SUBJECT TO COMPROMISE

      As reflected in the consolidated financial statements, liabilities subject
      to compromise refers to the Debtors' liabilities incurred prior to the
      commencement of the Chapter 11 Cases. The amounts of the various
      liabilities that are subject to compromise are set forth in the table
      below. These amounts represent the Debtors' estimate of known or potential
      pre-petition claims to be resolved in connection with the Chapter 11
      Cases. Such claims remain subject to future adjustments. Adjustments may
      result from (i) negotiations, (ii) actions of the Bankruptcy Court, (iii)
      further developments with respect to disputed claims, (iv) rejection of
      executory contracts and unexpired leases, (v) the determination as to the
      value of any collateral securing claims, (vi) proofs of claim, including
      unaccrued and unrecorded post-petition interest expense, (vii) effect of
      any legislation which may be enacted or (viii) other events.

      The amount shown below for the asbestos reserve reflects the Corporation's
      pre-petition estimate of liability associated with asbestos claims filed
      against U.S. Gypsum in the tort system through 2003, and this liability,
      in addition to liability for post-2003 claims, is the subject of
      significant dispute in the Chapter 11 Cases. See Note 13. Litigation for
      further discussion regarding the asbestos reserve and for additional
      information on the background of asbestos litigation and developments in
      the Corporation's reorganization proceedings.

      As of the date of this report, virtually all of the Corporation's
      pre-petition debt is in default due to the Filing and included in
      liabilities subject to compromise. This includes debt outstanding of $469
      million under the pre-petition bank credit facilities and $536 million of
      other outstanding debt.

      Payment terms for liabilities subject to compromise will be established as
      part of a plan of reorganization under the Chapter 11 Cases. Liabilities
      subject to compromise in the consolidated and debtor-in-possession balance
      sheets consisted of the following items (dollars in millions):



                                                            As of           As of
                                                        September 30,    December 31,
                                                            2004            2003
                                                        -------------    ------------
                                                                   
Accounts payable                                        $         162    $        162
Accrued expenses                                                   41              44
Debt                                                            1,005           1,005
Asbestos reserve                                                1,061           1,061
Other long-term liabilities                                        13              14
                                                        -------------    ------------
Subtotal                                                        2,282           2,286
Elimination of intercompany accounts payable                      (43)            (43)
                                                        -------------    ------------
Total liabilities subject to compromise                         2,239           2,243
                                                        =============    ============


                                      -13-


      INTERCOMPANY TRANSACTIONS

      In the normal course of business, the Corporation (also referred to as the
      "Parent Company" in the following discussion of intercompany transactions)
      and the operating subsidiaries engage in intercompany transactions. To
      document the relations created by these transactions, the Parent Company
      and the operating subsidiaries, from the formation of the Corporation in
      1985, have been parties to intercompany loan agreements that evidence
      their obligations as borrowers or rights as lenders arising out of
      intercompany cash transfers and various allocated intercompany charges
      (the "Intercompany Corporate Transactions").

      The Corporation operates a consolidated cash management system under which
      the cash receipts of the domestic operating subsidiaries are ultimately
      concentrated in Parent Company accounts. Cash disbursements for those
      operating subsidiaries originate from those Parent Company concentration
      accounts. Allocated intercompany charges from the Parent Company to the
      operating subsidiaries primarily include expenses related to rent,
      property taxes, information technology, and research and development,
      while allocated intercompany charges between certain operating
      subsidiaries primarily include expenses for shared marketing, sales,
      customer service, engineering and accounting services. Detailed accounting
      records are maintained of all cash flows and intercompany charges through
      the system in either direction. Net balances, receivables or payables of
      such cash transactions are reviewed on a regular basis with interest
      earned or accrued on the balances. During the first six months of 2001,
      the Corporation took steps to secure the obligations from each of the
      principal domestic operating subsidiaries under the intercompany loan
      agreements when it became clear that the asbestos liability claims of U.S.
      Gypsum were becoming an increasingly greater burden on the Corporation's
      cash resources.

      As of September 30, 2004, U.S. Gypsum and USG Interiors had net
      pre-petition payable balances to the Parent Company for Intercompany
      Corporate Transactions of $295 million and $109 million, respectively. L&W
      Supply had a net pre-petition receivable balance from the Parent Company
      of $33 million. These pre-petition balances are subject to the provisions
      of the Tolling Agreement discussed above. See Pre-Petition Liabilities
      Other Than Asbestos Personal Injury Claims, above.

      As of September 30, 2004, U.S. Gypsum and L&W Supply had net post-petition
      receivable balances from the Parent Company for Intercompany Corporate
      Transactions of $347 million and $192 million, respectively. USG Interiors
      had a net post-petition payable balance to the Parent Company of $8
      million.

      In addition to the above transactions, the operating subsidiaries engage
      in ordinary course purchase and sale of products with other operating
      subsidiaries (the "Intercompany Trade Transactions"). Detailed accounting
      records also are maintained of all such transactions, and settlements are
      made on a monthly basis. Certain Intercompany Trade Transactions between

                                      -14-


      U.S. and non-U.S. operating subsidiaries are settled via wire transfer
      payments utilizing several payment systems.

      CHAPTER 11 REORGANIZATION EXPENSES

      Chapter 11 reorganization expenses in the consolidated and
      debtor-in-possession statements of earnings consisted of the following
      (dollars in millions):



                                              Three Months          Nine Months
                                           ended September 30,   ended September 30,
                                           -------------------   ------------------
                                            2004       2003       2004       2003
                                           -------    -------    -------    -------
                                                                
Legal and financial advisory fees          $     7    $     4    $    17    $    13
Bankruptcy-related interest income              (3)        (2)        (7)        (6)
                                           -------    -------    -------    -------
Total chapter 11 reorganization expenses         4          2         10          7
                                           =======    =======    =======    =======


      INTEREST EXPENSE

      For the third quarter and first nine months of 2004, contractual interest
      expense not accrued or recorded on pre-petition debt totaled $18 and $53
      million, respectively. From the Petition Date through September 30, 2004,
      contractual interest expense not accrued or recorded on pre-petition debt
      totaled $239 million. Although no post-petition accruals are required to
      be made for such contractual interest expense, debtholders may seek to
      recover such amounts in the Chapter 11 Cases.

      DIP FINANCIAL STATEMENTS

      Under the Bankruptcy Code, the Corporation is required to file
      periodically with the Bankruptcy Court various documents including
      financial statements of the Debtors (the Debtor-In-Possession or "DIP"
      financial statements). The Corporation cautions that these financial
      statements are prepared according to requirements under the Bankruptcy
      Code. While these financial statements accurately provide information
      required under the Bankruptcy Code, they are nonetheless unconsolidated,
      unaudited and prepared in a format different from that used in the
      Corporation's consolidated financial statements filed under the securities
      laws. Accordingly, the Corporation believes the substance and format do
      not allow meaningful comparison with the Corporation's regular publicly
      disclosed consolidated financial statements. The Debtors consist of the
      Corporation and the following wholly owned subsidiaries: United States
      Gypsum Company; USG Interiors, Inc.; USG Interiors International, Inc.;
      L&W Supply Corporation; Beadex Manufacturing, LLC; B-R Pipeline Company;
      La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG Industries,
      Inc.; and USG Pipeline Company.

      The condensed DIP financial statements of the Debtors are presented as
      follows:

                                      -15-


                   USG CORPORATION AND OTHER DEBTOR COMPANIES
                   DEBTOR-IN-POSSESSION STATEMENT OF EARNINGS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)



                                         THREE MONTHS            NINE MONTHS
                                      ENDED SEPTEMBER 30,    ENDED SEPTEMBER 30,
                                      -------------------    -------------------
                                        2004       2003        2004        2003
                                      --------   --------    --------    --------
                                                             
Net sales                             $  1,066   $    864    $  3,019    $  2,472
Cost of products sold                      870        748       2,518       2,151
Selling and administrative expenses         69         67         201         206
Chapter 11 reorganization expenses           4          2          10           7
Interest expense                             1          1           3           4
Interest income                              -          -          (1)         (1)
Other (income) expense, net                  -         (1)          -          (5)
                                      --------   --------    --------    --------
Earnings before income taxes and
  cumulative effect of accounting
  change                                   122         47         288         110

Income taxes                                51         21         124          50
                                      --------   --------    --------    --------
Earnings before cumulative effect
  of accounting change                      71         26         164          60
Cumulative effect of accounting
  change                                     -          -           -         (13)
                                      --------   --------    --------    --------
Net earnings                                71         26         164          47
                                      ========   ========    ========    ========


                                      -16-


                   USG CORPORATION AND OTHER DEBTOR COMPANIES
                       DEBTOR-IN-POSSESSION BALANCE SHEETS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)



                                                        AS OF          AS OF
                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        2004            2003
                                                    ------------    ------------
                                                              
ASSETS
Current Assets:
Cash and cash equivalents                           $        421    $        489
Short-term marketable securities                             129              64
Restricted cash                                               12               7
Receivables (net of reserves - $10 and $11)                  407             276
Inventories                                                  308             232
Income taxes receivable                                       20              21
Deferred income taxes                                         31              41
Other current assets                                          70              47
                                                    ------------    ------------
Total current assets                                       1,398           1,177
Long-term marketable securities                              258             176
Property, plant and equipment (net of accumulated
  depreciation and depletion - $707 and $645)              1,586           1,576
Deferred income taxes                                        136             178
Goodwill                                                      41              39
Other assets                                                 351             358
                                                    ------------    ------------
Total Assets                                               3,770           3,504
                                                    ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                             215             168
Accrued expenses                                             192             186
Income taxes payable                                          16               4
                                                    ------------    ------------
Total current liabilities                                    423             358
Other liabilities                                            428             403
Liabilities subject to compromise                          2,239           2,243
Stockholders' Equity:
Preferred stock                                                -               -
Common stock                                                   5               5
Treasury stock                                              (258)           (258)
Capital received in excess of par value                      101             101
Accumulated other comprehensive income                        24               8
Retained earnings                                            808             644
                                                    ------------    ------------
Total stockholders' equity                                   680             500
                                                    ------------    ------------
Total Liabilities and Stockholders' Equity                 3,770           3,504
                                                    ============    ============


                                      -17-


                   USG CORPORATION AND OTHER DEBTOR COMPANIES
                  DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)



                                                          NINE MONTHS
                                                      ENDED SEPTEMBER 30,
                                                     ---------------------
                                                       2004         2003
                                                     ---------    ---------
                                                            
OPERATING ACTIVITIES:
Net earnings                                         $     164    $      47
Adjustments to reconcile net earnings to net cash:
   Cumulative effect of accounting change                    -           13
   Depreciation, depletion and amortization                 70           66
   Deferred income taxes                                    43           40
   (Gain) loss on asset dispositions                         -            -
(Increase) decrease in working capital:
    Receivables                                           (131)         (76)
    Income taxes receivable                                  1           (4)
    Inventories                                            (76)          (4)
    Payables                                                59           35
    Accrued expenses                                         6          (32)
(Increase) decrease in intercompany receivable              33           (8)
(Increase) decrease in other assets                        (29)          (5)
Increase (decrease) increase in other liabilities           16           34
Change in asbestos receivable                               11           19
Decrease in liabilities subject to compromise               (4)         (20)
Other, net                                                  (2)          (7)
                                                     ---------    ---------
Net cash provided by operating activities                  161           98
                                                     ---------    ---------
INVESTING ACTIVITIES:
Capital expenditures                                       (70)         (45)
Purchases of marketable securities                        (361)        (197)
Sale or maturities of marketable securities                210          141
Net proceeds from asset dispositions                         1            1
Acquisition of business                                     (4)          (3)
                                                     ---------    ---------
Net cash used for investing activities                    (224)        (103)
                                                     ---------    ---------
FINANCING ACTIVITIES:
Deposit of restricted cash                                  (5)          (6)
                                                     ---------    ---------
Net cash used for financing activities                      (5)          (6)
                                                     ---------    ---------
Net decrease in cash and cash equivalents                  (68)         (11)

Cash and cash equivalents at beginning of period           489          478
                                                     ---------    ---------
Cash and cash equivalents at end of period                 421          467
                                                     =========    =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid                                                1            1
Income taxes paid, net                                      64           (1)


                                      -18-


(3)   EXIT ACTIVITIES

      In the fourth quarter of 2003, the Corporation recorded a charge of $3
      million pretax ($2 million after-tax) for severance related to a salaried
      workforce reduction of approximately 70 employees. An additional 56 open
      positions were eliminated. Payments totaling $1 million were made in the
      fourth quarter of 2003, and a reserve of $2 million was included in
      accrued expenses on the consolidated balance sheet as of December 31,
      2003. The remaining payments of $2 million were made in the first quarter
      of 2004.

(4)   EARNINGS PER SHARE

      Basic earnings per share are based on the weighted average number of
      common shares outstanding. Diluted earnings per share are based on the
      weighted average number of common shares outstanding and the dilutive
      effect of the potential exercise of outstanding stock options. Diluted
      earnings per share exclude the potential exercise of outstanding stock
      options for any period in which such exercise would have an anti-dilutive
      effect. The reconciliation of basic earnings per share to diluted earnings
      per share is shown in the following table (dollars in millions, except
      share data):



                                                              Weighted
                                                              Average
                                      Net         Shares     Per-Share
                                    Earnings      (000)        Amount
                                   ----------   ----------   ----------
                                                    
Three Months Ended September 30,
2004:
Basic earnings                     $       90       43,017   $     2.10
Dilutive effect of stock options                         1
                                   ----------   ----------   ----------
Diluted earnings                           90       43,018         2.10
                                   ==========   ==========   ==========
2003:
Basic earnings                             39       43,053         0.89
Dilutive effect of stock options                         1
                                   ----------   ----------   ----------
Diluted earnings                           39       43,054         0.89
                                   ==========   ==========   ==========
Nine Months Ended September 30,
2004:
Basic earnings                     $      227       43,019   $     5.28
Dilutive effect of stock options                         1
                                   ----------   ----------   ----------
Diluted earnings                          227       43,020         5.28
                                   ==========   ==========   ==========
2003:
Basic earnings                             76       43,083         1.75
Dilutive effect of stock options                         -
                                   ----------   ----------   ----------
Diluted earnings                           76       43,083         1.75
                                   ==========   ==========   ==========


                                      -19-


(5)   MARKETABLE SECURITIES

      As of September 30, 2004 and 2003, the Corporation's investments in
      marketable securities consisted of the following (dollars in millions):



                                                2004                    2003
                                        ---------------------   ---------------------
                                                      Fair                    Fair
                                        Amortized    Market     Amortized    Market
                                          Cost        Value       Cost        Value
                                        ---------   ---------   ---------   ---------
                                                                
Asset-backed securities                 $     165   $     165   $     107   $     107
U.S. government and agency securities          72          72          73          74
Municipal securities                           34          33          30          30
Corporate securities                           99          99          24          24
Time deposits                                  18          18           -           -
                                        ---------   ---------   ---------   ---------
Total marketable securities                   388         387         234         235
                                        =========   =========   =========   =========


      Contractual maturities of marketable securities as of September 30, 2004,
      were as follows (dollars in millions):



                                            Fair
                              Amortized    Market
                                Cost        Value
                              ---------   ---------
                                    
Due in 1 year or less         $     125   $     125
Due in 1-5 years                     54          53
Due in 5-10 years                     3           3
Due after 10 years                   41          41
                              ---------   ---------
                                    223         222
Asset-backed securities             165         165
                              ---------   ---------
Total marketable securities         388         387
                              =========   =========


      The average duration of the portfolio is less than one year because a
      majority of the longer-term securities have paydown or put features and
      liquidity facilities.

      The Corporation had investments in marketable securities with a fair
      market value of $200 million that were in an unrealized loss position for
      less than 12 months as of September 30, 2004. These investments were in
      the following types of securities: $100 million in asset-backed
      securities, $59 million in government and agency securities, $31 million
      in corporate bonds, $5 million in Government Mortgage Backed Securities
      and $5 million in municipal/provincial bonds. The unrealized losses for
      these investments amounted to $1 million. The Corporation also had $2
      million in asset backed securities that had been in a continuous loss
      position for a period greater than 12 months as of September 30, 2004. The
      amount of unrealized loss positions for these investments was less than
      $100,000.

                                      -20-


(6)   ASSET RETIREMENT OBLIGATIONS

      On January 1, 2003, the Corporation adopted SFAS No. 143, "Accounting for
      Asset Retirement Obligations." This standard requires the recording of the
      fair value of a liability for an asset retirement obligation in the period
      in which it is incurred. The Corporation's asset retirement obligations
      include reclamation requirements as regulated by government authorities
      related principally to assets such as the Corporation's mines, quarries,
      landfills, ponds and wells. The impact to the Corporation of adopting SFAS
      No. 143 was an increase in assets of $14 million, which included a $12
      million increase in deferred tax assets, and an increase in liabilities of
      $30 million, which included a $1 million increase in deferred tax
      liabilities. A noncash, after-tax charge of $16 million ($27 million
      pretax) was reflected on the consolidated statement of earnings as a
      cumulative effect of a change in accounting principle as of January 1,
      2003. Changes in the liability for asset retirement obligations during the
      first nine months of 2004 consisted of the following (dollars in
      millions):



                                      2004
                                      ----
                                   
Balance as of December 31, 2003       $ 35
Accretion expense                        2
Liabilities incurred                     7
Liabilities settled                     (2)
                                      ----
Balance as of September 30, 2004        42
                                      ====


(7)   GOODWILL AND OTHER INTANGIBLE ASSETS

      Total goodwill amounted to $41 million as of September 30, 2004, and $39
      million as of December 31, 2003. Goodwill increased by $2 million during
      the first nine months of 2004 as a result of a business acquisition.

      Other intangible assets amounted to $2 million as of September 30, 2004,
      and December 31, 2003. As of September 30, 2004, $1 million of this amount
      was subject to amortization over a five-year life. Other intangible assets
      are included in other assets on the consolidated balance sheet.

                                      -21-


(8)   DERIVATIVE INSTRUMENTS

      The Corporation uses derivative instruments to manage selected commodity
      price and foreign currency exposures. The Corporation does not use
      derivative instruments for trading purposes. All derivative instruments
      are recorded on the balance sheet at fair value. For derivatives
      designated as fair value hedges, the changes in the fair values of both
      the derivative instrument and the hedged item are recognized in earnings
      in the current period. For derivatives designated as cash flow hedges, the
      effective portion of changes in the fair value of the derivative is
      recorded to accumulated other comprehensive income (loss) on the balance
      sheet and is reclassified to earnings when the underlying transaction has
      an impact on earnings. The ineffective portion of changes in the fair
      value of the derivative is reported in cost of products sold. The amount
      of ineffectiveness amounted to a pretax loss of $1.5 million in the third
      quarter of 2004 and pretax income of $27,000 in the first nine months of
      2004. As of September 30, 2004, the Corporation had no foreign currency
      contracts.

      COMMODITY DERIVATIVE INSTRUMENTS

      The Corporation uses swap contracts to hedge anticipated purchases of
      natural gas to be used in its manufacturing operations. The current
      contracts, all of which mature by December 31, 2006, are generally
      designated as cash flow hedges, with changes in fair value recorded to
      accumulated other comprehensive income (loss) until the hedged transaction
      occurs, at which time it is reclassified to earnings. As of September 30,
      2004, the fair value of these swap contracts was $25 million ($41 million
      pre-tax), of which $25 million ($40 million pre-tax) remained in
      accumulated other comprehensive income (loss).

      COUNTERPARTY RISK

      The Corporation is exposed to credit losses in the event of nonperformance
      by the counterparties on its financial instruments. All counterparties
      have investment grade credit standing; accordingly, the Corporation
      anticipates that these counterparties will be able to satisfy fully their
      obligations under the contracts. The Corporation does not generally obtain
      collateral or other security to support financial instruments subject to
      credit risk but monitors the credit standing of all counterparties.

                                      -22-


(9)   COMPREHENSIVE INCOME

      The components of comprehensive income are summarized in the following
      table (dollars in millions):



                                               Three Months                Nine Months
                                           ended September 30,          ended September 30,
                                         ------------------------    ------------------------
                                            2004          2003          2004          2003
                                         ----------    ----------    ----------    ----------
                                                                       
Net earnings                             $       90    $       39    $      227    $       76
                                         ----------    ----------    ----------    ----------
Pretax gain (loss) on derivatives                15           (21)           27           (23)
Income tax benefit (expense)                     (5)            8           (10)            9
                                         ----------    ----------    ----------    ----------
Gain (loss) on derivatives, net of tax           10           (13)           17           (14)
                                         ----------    ----------    ----------    ----------
Deferred currency translation                    14            (2)            5            22
                                         ----------    ----------    ----------    ----------
Unrealized gain (loss) on marketable
  securities, net of tax                          1             -             -             -
                                         ----------    ----------    ----------    ----------
Total comprehensive income                      115            24           249            84
                                         ==========    ==========    ==========    ==========


      There was no tax impact on the foreign currency translation adjustments.

      The components of accumulated other comprehensive income (loss) included
      on the consolidated balance sheets are summarized in the following table
      (dollars in millions):



                                                                 As of           As of
                                                              September 30,   December 31,
                                                                  2004            2003
                                                              ------------    ------------
                                                                        
Gain on derivatives, net of tax                               $         27    $         10
Deferred currency translation                                           (3)             (8)
Minimum pension liability, net of tax                                   (3)             (3)
Unrealized gain (loss) on marketable securities, net of tax              -               -
                                                              ------------    ------------
Total accumulated other comprehensive income (loss)                     21              (1)
                                                              ============    ============


      During the third quarter of 2004, accumulated net after-tax gains of $3
      million ($5 million pretax) on derivatives were reclassified from
      accumulated other comprehensive income (loss) to earnings. As of September
      30, 2004, the estimated net after-tax gain expected to be reclassified
      within the next 12 months from accumulated other comprehensive income
      (loss) into earnings is $23 million ($37 million pretax).

                                      -23-


(10)  EMPLOYEE RETIREMENT PLANS

      The components of net pension and postretirement benefits costs for the
      three months and nine months ended September 30, 2004 and 2003 are
      summarized in the following table (dollars in millions):



                                       Three Months              Nine Months
                                    ended September 30,       ended September 30,
                                  ----------------------    ----------------------
                                    2004         2003         2004         2003
                                  ---------    ---------    ---------    ---------
                                                             
PENSION:
Service cost of benefits earned   $       7    $       7    $      23    $      21
Interest cost on projected
     benefit obligation                  14           13           41           39
Expected return on plan assets          (13)         (13)         (40)         (39)
Net amortization                          5            2           14            8
                                  ---------    ---------    ---------    ---------
Net cost                                 13            9           38           29
                                  =========    =========    =========    =========
POSTRETIREMENT:
Service cost of benefits earned           4            3           11            9
Interest cost on projected
     benefit obligation                   6            5           17           16
Recognized (gain) loss                   (1)           -            1            -
                                  ---------    ---------    ---------    ---------
Net cost                                  9            8           29           25
                                  =========    =========    =========    =========


      In accordance with the Corporation's funding policy, the Corporation and
      its subsidiaries contributed cash of $18 million and $56 million during
      the third quarter and first nine months of 2004, respectively, and expect
      to contribute cash of approximately $77 million during the full year 2004
      to their pension plans.

      On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued
      FASB Staff Position ("FSP") FAS 106-2, "Accounting and Disclosure
      Requirements Related to the Medicare Prescription Drug, Improvement and
      Modernization Act of 2003." FSP 106-2 provides guidance on accounting for
      the effects of prescription drug provisions of the Medicare Act (the
      "Act") for employers that sponsor postretirement health care plans that
      provide prescription drug benefits and requires those employers to provide
      certain disclosures regarding the effect of the federal subsidy provided
      by the Act. This FSP supercedes FSP 106-1 of the same subject that allowed
      employers to either defer or recognize the legislation's effect. The new
      disclosure requirements will be effective for the first financial
      reporting period that begins after June 15, 2004. The Corporation adopted
      FSP 106-2 effective July 1, 2004 and estimates that the adoption of this
      FSP will result in an approximate $40 million reduction in its accumulated
      postretirement benefit obligation and a related $3 million reduction in
      net periodic postretirement benefit cost during the last six months of
      2004 versus the cost previously anticipated.

                                      -24-


      In addition, the required remeasurement of the plan's liability assumed a
      change in the health-care-cost trend rate which resulted in increases in
      the accumulated postretirement benefit obligation and net periodic
      postretirement benefit cost. These increases largely offset the reduction
      in the liability and costs related to the adoption of FSP 106-2 as
      described above.

      In the third quarter of 2004, the Corporation announced a change in the
      contribution requirements for participants in its retiree medical
      programs. This change was deemed to be a significant event under SFAS No.
      106 and accordingly the plan's obligations were remeasured resulting in an
      approximate $67 million reduction in the accumulated postretirement
      benefit obligation.

(11)  STOCK-BASED COMPENSATION

      The Corporation accounts for stock-based compensation using the intrinsic
      value method, which measures compensation cost as the quoted market price
      of the stock at the date of grant less the grant price, if any, that the
      employee is required to pay. If the Corporation had elected to recognize
      compensation cost for stock-based compensation grants using the fair value
      method, net earnings and net earnings per common share would not have
      changed because stock options issued prior to the Filing are fully vested
      and no stock options have been issued subsequent to the Filing.

      As of September 30, 2004, common shares totaling 2,227,500 were reserved
      for future issuance in conjunction with existing stock option grants. In
      addition, 2,668,720 common shares were reserved for future grants. Shares
      issued in option exercises may be from original issue or available
      treasury shares.

(12)  OPERATING SEGMENTS

      The Corporation's operations are organized into three operating segments:
      (i) North American Gypsum, which manufactures SHEETROCK(R) brand gypsum
      wallboard and joint compound, DUROCK(R) brand cement board, FIBEROCK(R)
      brand gypsum fiber panels and other related building products in the
      United States, Canada and Mexico; (ii) Worldwide Ceilings, which
      manufactures ceiling tile in the United States and ceiling grid in the
      United States, Canada, Europe and the Asia-Pacific region; and (iii)
      Building Products Distribution, which distributes gypsum wallboard,
      drywall metal, ceiling products, joint compound and other building
      products throughout the United States. Operating segment results were as
      follows (dollars in millions):

                                      -25-




                                          Three Months              Nine Months
                                       ended September 30,       ended September 30,
                                     ----------------------    ----------------------
                                        2004         2003         2004         2003
                                     ----------   ---------    ---------    ---------
                                                                
North American Gypsum                $     708    $     600    $   2,025    $   1,708
Worldwide Ceilings                         168          157          524          458
Building Products Distribution             470          341        1,286          961
Eliminations                              (171)        (135)        (495)        (388)
                                     ---------    ---------    ---------    ---------
Total USG Corporation                    1,175          963        3,340        2,739
                                     =========    =========    =========    =========
OPERATING PROFIT:
North American Gypsum                      125           60          308          145
Worldwide Ceilings                          14           12           55           29
Building Products Distribution              31           17           76           41
Corporate                                  (20)         (20)         (56)         (56)
Chapter 11 reorganization expenses          (4)          (2)         (10)          (7)
Eliminations                                 2            -            -            -
                                     ---------    ---------    ---------    ---------
Total USG Corporation                      148           67          373          152
                                     =========    =========    =========    =========


(13)  LITIGATION

      ASBESTOS AND RELATED BANKRUPTCY LITIGATION

      One of the Corporation's subsidiaries, U.S. Gypsum, is among many
      defendants in more than 100,000 asbestos lawsuits alleging personal injury
      or property damage liability. Most of the asbestos lawsuits against U.S.
      Gypsum seek compensatory and, in many cases, punitive damages for personal
      injury allegedly resulting from exposure to asbestos-containing products
      (the "Personal Injury Cases"). Certain of the asbestos lawsuits seek to
      recover compensatory and, in many cases, punitive damages for costs
      associated with the maintenance or removal and replacement of
      asbestos-containing products in buildings (the "Property Damage Cases").

      U.S. Gypsum's asbestos liability derives from its sale of certain
      asbestos-containing products beginning in the late 1920s. In most cases,
      the products were discontinued or asbestos was removed from the formula by
      1972, and no asbestos-containing products were produced after 1978.

      In addition to the Personal Injury Cases pending against U.S. Gypsum, two
      other Debtors, L&W Supply and Beadex Manufacturing, LLC, have been named
      as defendants in a small number of asbestos personal injury cases. In
      addition, the legal representative for future asbestos claimants recently
      raised the issue of whether the Debtors may be liable for certain of the
      asbestos liabilities of A.P. Green Refractories Co., a former subsidiary
      of U.S. Gypsum and USG Corporation.

      More information regarding the Property Damage and Personal Injury Cases
      against U.S. Gypsum and the asbestos personal injury cases against L&W
      Supply, Beadex Manufacturing, LLC, and A.P. Green Refractories Co. is set

                                      -26-


      forth below.

      The amount of the Debtors' present and future asbestos liabilities is the
      subject of significant dispute in Debtors' Chapter 11 Cases. If the amount
      of the Debtors' asbestos liabilities is not resolved through negotiation
      in the Chapter 11 Cases or addressed by federal legislation, the amount of
      those liabilities may be determined through litigation proceedings in the
      Chapter 11 Cases, the outcome of which is extremely speculative.

      DEVELOPMENTS IN THE REORGANIZATION PROCEEDINGS: In late 2001, the Debtors'
      Chapter 11 Cases, along with four other asbestos-related bankruptcies,
      were assigned to Judge Alfred M. Wolin of the United States District Court
      for the District of New Jersey. As a result of developments in the
      reorganization proceedings, discussed below, the Debtors' Chapter 11 Cases
      were recently assigned to Judge Joy Flowers Conti of the United States
      District Court for the Western District of Pennsylvania, who replaces
      Judge Wolin.

      In 2002, the Debtors filed a motion requesting Judge Wolin to conduct
      hearings to substantively estimate the Debtors' liability for asbestos
      personal injury claims. The Debtors requested that the Court hear evidence
      and make rulings regarding the characteristics of valid asbestos personal
      injury claims against the Debtors and then estimate the Debtors' liability
      for present and future asbestos personal injury claims based upon these
      rulings. One of the key liability issues is whether claimants who do not
      have objective evidence of asbestos-related disease have valid claims and
      are entitled to be compensated by the Debtors or whether such claimants
      are entitled to compensation only if and when they develop
      asbestos-related disease.

      The Official Committee of Asbestos Personal Injury Claimants opposed the
      substantive estimation hearings proposed by the Debtors. The committee
      contends that the Debtors' liability for present and future asbestos
      personal injury claims should be based on extrapolation from the
      settlement history of such claims and not on litigating liability issues
      in the bankruptcy proceedings. The committee contends that the Bankruptcy
      Court does not have the power to exclude claimants who do not have
      objective evidence of asbestos-related disease if such claimants are
      compensated in the tort system outside of bankruptcy.

      The Debtors also filed a motion requesting a ruling that putative
      claimants who cannot satisfy objective standards of asbestos-related
      disease are not entitled to vote on a Section 524(g) plan. The Debtors'
      motion was stayed by order of Judge Wolin. It is expected that the
      Official Committee of Asbestos Personal Injury Claimants will oppose the
      Debtors' motion.

      In response to the Debtors' motion seeking substantive estimation of the
      Debtors' asbestos personal injury liability, Judge Wolin issued a
      Memorandum Opinion and Order (the "Order") on February 19, 2003, setting
      forth a

                                      -27-


      procedure for estimating the Debtors' liability for present and future
      asbestos personal injury claims alleging cancer. The Order provides that
      the Court will set a bar date for the filing of asbestos personal injury
      claims alleging cancer and that the Court will hold an estimation hearing
      regarding these claims under 11 U.S.C. Section 502(c), at which the
      "debtors will be permitted to present their defenses."

      The Order contemplates that after the estimation of the Debtors' liability
      for present and future cancer claims, the Court will determine whether the
      Debtors' liability for these cancer claims alone exceeds the Debtors'
      assets. According to the Order, the determination of whether the Debtors
      have sufficient assets to pay legitimate cancer claimants will guide the
      Court in determining whether the Debtors' resources should be spent
      resolving the issue of the validity of non-malignant claims where there is
      no objective evidence of asbestos-related disease.

      No timetable has been set for implementation of the Order or any hearing
      on estimation of the Debtors' liability for cancer claims.

      In November 2003, the Debtors and the committee representing unsecured
      creditors in the Chapter 11 Cases filed a motion to recuse, or remove,
      Judge Wolin from presiding over these cases. On May 17, 2004, the Third
      Circuit Court of Appeals issued an opinion and order directing Judge Wolin
      to remove himself from presiding over Debtors' Chapter 11 Cases. On
      September 27, 2004, the Third Circuit Court of Appeals assigned Judge Joy
      Flowers Conti of the United States District Court for the Western District
      of Pennsylvania to the Debtors' Chapter 11 Cases.

      In the third quarter of 2004, pursuant to an order of Judge Fitzgerald,
      the bankruptcy judge presiding over the Debtors' Chapter 11 Cases, the
      parties, including the committees, engaged in non-binding mediation
      relating to the Debtors' asbestos personal injury liability and the
      potential terms of a plan of reorganization. The mediation was conducted
      before David Geronemus, who was appointed mediator by Judge Fitzgerald.
      The mediation has not resulted in an agreement regarding the Debtors'
      asbestos liability or the terms of a plan of reorganization.

      Prior to the mediation, the Debtors were informed by the mediator that the
      legal representative for future asbestos claimants has raised the issue of
      whether USG Corporation and its subsidiaries may be liable for asbestos
      personal injury claims arising from the sale of asbestos-containing
      products by A.P. Green Refractories Co. ("A.P. Green") before 1967. A.P.
      Green, which manufactured and sold products used in refractories, was
      acquired by merger into U.S. Gypsum in 1967 and thereafter operated as a
      wholly-owned subsidiary of U.S. Gypsum until 1985, at which time A.P.
      Green became a wholly-owned subsidiary of USG Corporation. In 1988, A.P.
      Green became a publicly-traded company when its shares were distributed to
      the stockholders of USG Corporation. In February 2002, A.P. Green (now
      known as A.P. Green

                                      -28-


      Industries, Inc.), as well as its parent company, Global Industrial
      Technologies, Inc., and other affiliates, filed voluntary petitions for
      reorganization through which A.P. Green and its affiliates seek to resolve
      their asbestos liabilities. The A.P. Green reorganization proceeding is
      pending in the United States Bankruptcy Court for the Western District of
      Pennsylvania and is captioned In re: Global Industrial Technologies, Inc.
      (Case No. 02-21626). The disclosure statement filed in July 2003 by the
      debtors in the A.P. Green reorganization proceedings states that there are
      235,757 asbestos personal injury claims pending against A.P. Green as well
      as about 59,000 such claims pending against an A.P. Green affiliate. The
      disclosure statement also states that A.P. Green has approximately $492
      million in unpaid prepetition settlements and judgments relating to
      asbestos personal injury claims. The disclosure statement does not provide
      an estimate of the cost of resolving A.P. Green's liability for pending or
      future asbestos claims.

      The Corporation does not have sufficient information to predict whether or
      how any plan of reorganization in the Debtors' Chapter 11 Cases might
      address any liability based on sales of asbestos-containing products by
      A.P. Green. The Corporation also does not have sufficient information to
      estimate the amount, or range of amounts, of A.P. Green's asbestos
      liabilities. If U.S. Gypsum is determined to be liable for the sale of
      asbestos-containing products by A.P. Green, this result likely would
      materially increase the amount of U.S. Gypsum's present and future
      asbestos liabilities and could materially and adversely affect the
      recovery of the Debtors' pre-petition creditors and holders of the
      Corporation's equity.

      The legal representative for future asbestos claimants and the Official
      Committee of Asbestos Personal Injury Claimants have also raised the issue
      of whether the assets and liabilities of all Debtors should be temporarily
      consolidated for purposes of the treatment of claims under a plan of
      reorganization. Under this theory, which is sometimes called "substantive
      consolidation," the liabilities of all Debtors subject to this
      consolidation, including liabilities based on sales of asbestos-containing
      products by U.S. Gypsum, would be paid from the pooled assets of U.S.
      Gypsum and all other Debtors subject to consolidation. If applied,
      substantive consolidation could materially and adversely affect the
      recovery rights of creditors of Debtors other than U.S. Gypsum and the
      holders of the Corporation's equity.

      As a result of the recent assignment of Judge Conti to the Debtors'
      Chapter 11 Cases, the Corporation does not know whether estimation
      proceedings regarding the Debtors' liability for cancer claims, as
      contemplated by Judge Wolin's February 19, 2003 Order, will occur. The
      Corporation also does not know whether the Court will ultimately address
      the validity and voting rights of non-malignant claims where there is no
      objective evidence of asbestos-related disease.

      With regard to asbestos property damage claims, the Bankruptcy Court

                                      -29-


      established a bar date requiring all such claims against the Debtors to be
      filed by January 15, 2003. Approximately 1,400 asbestos property damage
      claims were filed, representing more than 2,000 buildings. In contrast, as
      of the Petition Date, 11 Property Damage Cases were pending against U.S.
      Gypsum. Approximately 500 of the asbestos property damage claims filed by
      the bar date assert a specific dollar amount of damages, and the total
      damages alleged in those claims is approximately $1.6 billion. However,
      this amount reflects numerous duplicate claims filed against multiple
      Debtors. Approximately 900 claims do not specify a damage amount. Most of
      the asbestos property damage claims filed do not provide any evidence that
      the Debtors' products were ever installed in any of the buildings at
      issue. Certain of the proof of claim forms purport to file claims on
      behalf of two classes of claimants that were the subject of pre-petition
      class actions. One of these claim forms was filed on behalf of a class of
      colleges and universities that was certified for certain purposes in a
      pre-petition lawsuit filed in federal court in South Carolina. However,
      many of the putative members of this class also filed individual claim
      forms. Four of the claim forms were filed by a claimant allegedly on
      behalf of putative members of certified and uncertified classes in
      connection with a pre-petition lawsuit pending in South Carolina state
      court.

      The Debtors believe that they have substantial defenses to many of these
      property damage claims, including the lack of evidence that the Debtors'
      products were ever installed in the buildings at issue, the failure to
      file the claims within the applicable statutes of limitation, and the lack
      of evidence that the claimants have any damages. The Debtors intend to
      address many of these claims through an objection and disallowance process
      in the Bankruptcy Court. The Debtors have begun this process by issuing
      written notices to claimants that failed to provide evidence that any of
      the Debtors' products were ever installed in the buildings at issue. To
      date, the Debtors have issued these deficiency notices with regard to more
      than 1,600 buildings. Because of the preliminary nature of the objection
      process, the Corporation cannot predict the outcome of these proceedings
      or the impact the proceedings may have on the estimated cost of resolving
      asbestos property damage claims. See Estimated Cost, below.

      The following is a summary of the Personal Injury and Property Damage
      Cases pending against U.S. Gypsum and certain other Debtors as of the
      Petition Date.

      PERSONAL INJURY CASES: As reported by the Center for Claims Resolution
      (the "Center"), U.S. Gypsum was a defendant in more than 100,000 pending
      Personal Injury Cases as of the Petition Date, as well as an additional
      approximately 52,000 Personal Injury Cases that may be the subject of
      settlement agreements. In the first half of 2001, up to the Petition Date,
      approximately 26,200 new Personal Injury Cases were filed against U.S.
      Gypsum, as reported by the Center, as compared to 27,800 new filings in
      the first half of 2000. Prior to the Filing, U.S. Gypsum managed the
      handling and settlement of

                                      -30-


      Personal Injury Cases through its membership in the Center. From 1988 up
      to February 1, 2001, the Center administered and arranged for the defense
      and settlement of Personal Injury Cases against U.S. Gypsum and other
      Center members. During that period, costs of defense and settlement of
      Personal Injury Cases were shared among the members of the Center pursuant
      to predetermined sharing formula. Effective February 1, 2001, the Center
      members, including U.S. Gypsum, ended their prior settlement-sharing
      arrangement. Up until the Petition Date, the Center continued to
      administer and arrange for the defense and settlement of the Personal
      Injury Cases, but liability payments were not shared among the Center
      members.

      In 2000 and years prior, U.S. Gypsum and other Center members negotiated a
      number of settlements with plaintiffs' law firms that included agreements
      to resolve over time the firms' pending Personal Injury Cases as well as
      certain future claims (the "Long-Term Settlements"). With regard to future
      claims, these Long-Term Settlements typically provide that the plaintiffs'
      firms will recommend to their future clients that they defer filing, or
      accept nominal payments on, personal injury claims that do not meet
      established disease criteria and, with regard to those claims meeting
      established disease criteria, that the future clients agree to settle
      those claims for specified amounts. These Long-Term Settlements typically
      resolve claims for amounts consistent with historical per-claim settlement
      costs paid to the plaintiffs' firms involved. As a result of the Filing,
      cash payments by U.S. Gypsum under these Long-Term Settlements have
      ceased, and U.S. Gypsum expects that its obligations under these
      settlements will be determined in the bankruptcy proceedings and plan of
      reorganization.

      In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases.
      U.S. Gypsum's cash payments in 2000 to defend and resolve Personal Injury
      Cases totaled $162 million, of which $90 million was paid or reimbursed by
      insurance. In 2000, the average settlement per case was approximately
      $2,600, exclusive of defense costs. U.S. Gypsum made cash payments of $100
      million in 1999 and $61 million in 1998 to resolve Personal Injury Cases,
      of which $85 million and $45.5 million, respectively, were paid or
      reimbursed by insurance.

      During late 2000 and in 2001, following the bankruptcy filings of other
      defendants in asbestos personal injury litigation, plaintiffs
      substantially increased their settlement demands to U.S. Gypsum. In
      response to these increased settlement demands, U.S. Gypsum attempted to
      manage its asbestos liability by contesting, rather than settling, a
      greater number of cases that it believed to be non-meritorious. As a
      result, in the first and second quarters of 2001, U.S. Gypsum agreed to
      settle fewer Personal Injury Cases, but at a significantly higher cost per
      case.

      In the first half of 2001, up to the Petition Date, U.S. Gypsum closed
      approximately 18,900 Personal Injury Cases. In the first half of 2001, up
      to the Petition Date, U.S. Gypsum's total asbestos-related cash payments,

                                      -31-


      including defense costs, were approximately $124 million, of which
      approximately $10 million was paid or reimbursed by insurance. A portion
      of these payments were for settlements agreed to in prior periods. As of
      March 31, 2001, U.S. Gypsum had estimated that cash expenditures for
      Personal Injury Cases in 2001 would total approximately $275 million
      before insurance recoveries of approximately $37 million.

      In addition to the Personal Injury Cases pending against U.S. Gypsum, one
      of the Corporation's subsidiaries and a Debtor in the bankruptcy
      proceedings, L&W Supply, was named as a defendant in approximately 21
      pending Personal Injury Cases as of the Petition Date. L&W Supply, a
      distributor of building products manufactured by U.S. Gypsum and other
      building products manufacturers, has not made any payments in the past to
      resolve Personal Injury Cases.

      One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy
      proceedings, Beadex Manufacturing, LLC ("Beadex"), manufactured and sold
      joint compound containing asbestos from 1963 through 1978 in the
      northwestern United States. As of the Petition Date, Beadex was a named
      defendant in approximately 40 Personal Injury Cases pending primarily in
      the states of Washington and Oregon. Beadex has approximately $11 million
      in primary or umbrella insurance coverage available to pay
      asbestos-related costs, as well as $15 million in available excess
      coverage.

      The Corporation expects that any asbestos-related liability of L&W Supply
      and Beadex will be addressed in the plan of reorganization. However,
      because of, among other things, the small number of Personal Injury Cases
      pending against L&W Supply and Beadex to date, the Corporation does not
      have sufficient information at this time to predict how any plan of
      reorganization will address any asbestos-related liability of L&W Supply
      and Beadex.

      PROPERTY DAMAGE CASES: As of the Petition Date, U.S. Gypsum was a
      defendant in 11 Property Damage Cases, most of which involved multiple
      buildings. One of the cases is a conditionally certified class action
      comprising all colleges and universities in the United States, which
      certification is presently limited to the resolution of certain allegedly
      "common" liability issues (Central Wesleyan College v. W.R. Grace & Co.,
      et al., U.S.D.C. S.C.). As a result of the Filing, all Property Damage
      Cases are stayed against U.S. Gypsum. U.S. Gypsum's estimated cost of
      resolving the Property Damage Cases is discussed in Estimated Cost, below.

      INSURANCE COVERAGE: As of September 30, 2004, all prior receivables
      relating to insurance remaining to cover asbestos-related costs had been
      collected by U.S. Gypsum.

      ESTIMATED COST: In 2000, prior to the Filing, an independent consultant
      completed an actuarial study of U.S. Gypsum's current and potential future
      asbestos liabilities. This study was based on the assumption that U.S.

                                      -32-


      Gypsum's asbestos liability would continue to be resolved in the tort
      system. As part of this study, the Corporation and its independent
      consultant considered various factors that would impact the amount of U.S.
      Gypsum's asbestos personal injury liability. These factors included the
      number, disease, age, and occupational characteristics of claimants in the
      Personal Injury Cases; the jurisdiction and venue in which such cases were
      filed; the viability of claims for conspiracy or punitive damages; the
      elimination of indemnity sharing among Center members for future
      settlements and its negative impact on U.S. Gypsum's ability to continue
      to resolve claims at historical or acceptable levels; the adverse impact
      on U.S. Gypsum's settlement costs of recent bankruptcies of co-defendants;
      the possibility of additional bankruptcies of other defendants; the
      possibility of significant adverse verdicts due to recent changes in
      settlement strategies and related effects on liquidity; the inability or
      refusal of former Center members to fund their share of existing
      settlements and its effect on such settlement agreements; allegations that
      U.S. Gypsum and the other Center members are responsible for the share of
      certain settlement agreements that was to be paid by former members that
      have refused or are unable to pay; the continued ability to negotiate
      settlements or develop other mechanisms that defer or reduce claims from
      unimpaired claimants; the possibility that federal legislation addressing
      asbestos litigation would be enacted; epidemiological data concerning the
      incidence of past and projected future asbestos-related diseases; trends
      in the propensity of persons alleging asbestos-related disease to sue U.S.
      Gypsum; the pre-agreed settlement recommendations in, and the viability
      of, the Long-Term Settlements; anticipated trends in recruitment of
      non-malignant or unimpaired claimants by plaintiffs' law firms; and future
      defense costs. The study attempted to weigh relevant variables and assess
      the impact of likely outcomes on future case filings and settlement costs.

      In connection with the Property Damage Cases, the Corporation considered,
      among other things, the extent to which claimants could identify the
      manufacturer of any alleged asbestos-containing products in the buildings
      at issue in each case; the amount of asbestos-containing products at
      issue; the claimed damages; the viability of statute of limitations and
      other defenses; the amount for which such cases can be resolved, which
      normally (but not uniformly) has been substantially lower than the claimed
      damages; and the viability of claims for punitive and other forms of
      multiple damages.

      Based upon the results of the actuarial study, the Corporation determined
      that, although substantial uncertainty remained, it was probable that
      asbestos claims then pending against U.S. Gypsum and future asbestos
      claims to be filed against it through 2003 (both property damage and
      personal injury) could be resolved in the tort system for an amount
      between $889 million and $1,281 million, including defense costs, and that
      within this range the most likely estimate was $1,185 million. Consistent
      with this analysis, in the fourth quarter of 2000, the Corporation
      recorded a pretax noncash charge of $850 million to results of operations,
      which, combined with

                                      -33-


      the previously existing reserve, increased U.S. Gypsum's reserve for
      asbestos claims to $1,185 million. These amounts are stated before tax
      benefit and are not discounted to present value. Less than 10% of the
      reserve was attributable to defense and administrative costs. At the time
      of recording this reserve, it was expected that the reserve amounts would
      be expended over a period extending several years beyond 2003, because
      asbestos cases in the tort system historically have been resolved an
      average of three years after filing. The Corporation concluded that it did
      not have adequate information to allow it to reasonably estimate U.S.
      Gypsum's liability for asbestos claims to be filed after 2003.

      Because of the Filing and activities relating to potential federal
      legislation addressing asbestos personal injury claims, the Corporation
      believes that there is greater uncertainty in estimating the reasonably
      possible range of the Debtors' liability for pending and future asbestos
      claims as well as the most likely estimate of liability within this range.
      There are significant differences in the treatment of asbestos claims in a
      bankruptcy proceeding as compared to the tort litigation system. The
      factors that impact the estimation of liability for pending and future
      asbestos claims in a bankruptcy proceeding and the amount that must be
      provided in the plan of reorganization for such liabilities include: (i)
      the number of present and future asbestos claims that will be addressed in
      the plan of organization; (ii) the value that will be paid to present and
      future claims, including the impact historical settlement values for
      asbestos claims may have on the estimation of asbestos liability in the
      bankruptcy proceedings; (iii) how claims by individuals who have no
      objective evidence of impairment will be treated in the bankruptcy
      proceedings and plan of reorganization; (iv) how the Long-Term Settlements
      will be treated in the plan of reorganization and whether those
      settlements will be set aside; (v) how claims for punitive damages will be
      treated; (vi) the results of any litigation proceedings in the Chapter 11
      Cases regarding the estimated number or value of present and future
      asbestos personal injury claims alleging cancer or other diseases; (vii)
      the treatment of asbestos property damage claims in the bankruptcy
      proceedings; (viii) the potential asbestos liability of L&W, Beadex, A.P.
      Green, or any other past or present affiliates of the Debtors and how any
      such liability will be addressed in the bankruptcy proceedings and plan of
      reorganization; (ix) whether the Debtors are consolidated for purposes of
      the classification and treatment of claims under a plan of reorganization;
      (x) how the requirement of Section 524(g), that 75% of the voting asbestos
      claimants approve the plan of reorganization, will impact the amount that
      must be provided in the plan of reorganization for pending and future
      asbestos claims; and (xi) the impact any relevant potential federal
      legislation may have on the proceedings. See Note 2. Voluntary
      Reorganization Under Chapter 11 - Potential Federal Legislation Regarding
      Asbestos Personal Injury Claims. In addition, the estimates of the
      Debtors' asbestos liability that would be recorded as a result of the
      bankruptcy proceedings or the proposed federal legislation are likely to
      include all expected future asbestos cases to be brought against the
      Debtors

                                      -34-


      (as opposed to the cases filed over a three-year period), and are likely
      to be recorded using the present value of the estimated liability. These
      factors, as well as the uncertainties discussed above in connection with
      the resolution of asbestos cases in the tort system, increase the
      uncertainty of any estimate of asbestos liability.

      Because of the uncertainties associated with estimating the Debtors'
      asbestos liability at this stage of the proceedings, no change has been
      made at this time to the previously recorded reserve for asbestos claims,
      except to reflect certain minor asbestos-related costs incurred since the
      Filing. The reserve as of September 30, 2004, was $1,061 million.

      Because the Filing and the possible federal legislation have changed the
      basis upon which the Debtors' asbestos liability will be estimated, there
      can be no assurance that the current reserve accurately reflects the
      Debtors' ultimate liability for pending and future asbestos claims. At the
      time the reserve was increased to its current level in December 2000, the
      reserve was an estimate of the cost of resolving in the tort system U.S.
      Gypsum's asbestos liability for then pending claims and those to be filed
      through 2003. Although the Debtors have not participated in the tort
      system since June 2001 and have received no new asbestos cases since that
      time due to the filing of their Chapter 11 Cases, the reserve also is
      generally consistent with the amount the Corporation estimates that the
      Debtors would be required to pay to resolve their asbestos liability if
      the FAIR Act, as currently proposed, is enacted. As the Chapter 11 Cases
      and the legislation process proceed, the Debtors likely will gain more
      information from which a reasonable estimate of the Debtors' probable
      liability for present and future asbestos claims can be determined. If the
      FAIR Act or similar legislation is not enacted, the Debtors' asbestos
      liability, as determined through the bankruptcy proceedings, could be
      materially greater than the accrued reserve. Counsel for the Official
      Committee of Asbestos Personal Injury Claimants and counsel for the legal
      representative for future asbestos claimants have stated that the Debtors'
      liabilities for present and future asbestos claims exceed the value of the
      Debtors' assets, that the Debtors are insolvent, and, further, that the
      Debtors may be responsible for certain of the asbestos liabilities of A.P.
      Green. The Debtors have stated that they believe they are solvent if their
      asbestos liabilities are fairly and appropriately valued. When the Debtors
      determine that there is a reasonable basis for revision of the estimate of
      their asbestos liability, the reserve will be adjusted, and it is possible
      that a charge to results of operations will be necessary at that time. In
      such a case, the Debtors' asbestos liability could vary significantly from
      the recorded estimate of liability. This difference could be material to
      the Corporation's financial position, cash flows, and results of
      operations in the period recorded.

      BOND TO SECURE CERTAIN CENTER OBLIGATIONS: In January 2001, U.S. Gypsum
      obtained a performance bond from Safeco Insurance Company of America
      ("Safeco") in the amount of $60.3 million to secure certain obligations of

                                      -35-


      U.S. Gypsum for extended payout settlements of Personal Injury Cases and
      other obligations owed by U.S. Gypsum to the Center. The bond is secured
      by an irrevocable letter of credit obtained by the Corporation in the
      amount of $60.3 million and issued by JPMorgan Chase Bank (formerly Chase
      Manhattan Bank) ("JPMorgan Chase") to Safeco. After the Filing, by a
      letter dated November 16, 2001, the Center made a demand to Safeco for
      payment of $15.7 million under the bond, and, by a letter dated December
      28, 2001, the Center made a demand to Safeco for payment of approximately
      $127 million under the bond. The amounts for which the Center made demand
      were for the payment of, among other things, settlements of Personal
      Injury Cases that were entered into pre-petition. The total amount
      demanded by the Center under the bond, approximately $143 million, exceeds
      the original penal sum of the bond, which is $60.3 million. Safeco has not
      made any payment under the bond.

      On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary
      Complaint in the Chapter 11 Cases to, among other things, enjoin the
      Center from drawing on the bond and enjoin Safeco from paying on the bond
      during the pendency of these bankruptcy proceedings. This Adversary
      Proceeding is pending in the United States Bankruptcy Court for the
      District of Delaware and is captioned USG Corporation and United States
      Gypsum Company v. Center for Claims Resolution, Inc. and Safeco Insurance
      Company of America, No. 01-08932. Judge Wolin consolidated the Adversary
      Proceeding with similar adversary proceedings brought by Federal-Mogul
      Corp., et al., and Armstrong World Industries, Inc., et al., in their
      bankruptcy proceedings.

      The parties filed cross-motions for summary judgment in the consolidated
      proceedings. On March 28, 2003, in response to the cross-motions for
      summary judgment, Judge Wolin issued an order and memorandum opinion which
      granted in part and denied in part the Center's motion for summary
      judgment. Although the court ruled that Safeco is not required to remit
      any surety bond proceeds to the Center at this time, the court stated that
      certain settlements that were completed before U.S. Gypsum's Petition Date
      likely are covered by the surety bond but that the bond does not cover
      settlement payments that were not yet completed as of the Petition Date.
      The court did not rule on whether the bond covers other disputed
      obligations and reserved these issues to a subsequent phase of the
      litigation. As a result of the court's decision, it is likely that, absent
      a settlement of this matter, some portion of the bond may be drawn but
      that the amount drawn may be substantially less than the full amount of
      the bond. To the extent that Safeco were to pay all or any portion of the
      bond, it is likely that Safeco would draw down the JPMorgan Chase letter
      of credit to cover the bond payment and JPMorgan Chase would assert a
      pre-petition claim in a corresponding amount against the Corporation in
      the bankruptcy proceedings.

      It is expected that the CCR bond litigation will be addressed by Judge
      Conti, who was recently appointed to preside over the Debtors' Chapter 11
      Cases.

                                      -36-


      CONCLUSION: There are many uncertainties associated with the resolution of
      the asbestos liability in the bankruptcy proceedings. The Corporation will
      continue to review its asbestos liability as the Chapter 11 Cases progress
      and as issues relating to the estimation of the Debtors' asbestos
      liabilities are addressed. If such review results in the Debtors' estimate
      of the probable liability for present and future asbestos claims being
      different from the existing reserve, the reserve will be adjusted, and
      such adjustment could be material to the Corporation's financial position,
      cash flows and results of operations in the period recorded.

      ENVIRONMENTAL LITIGATION

      The Corporation and certain of its subsidiaries have been notified by
      state and federal environmental protection agencies of possible
      involvement as one of numerous "potentially responsible parties" in a
      number of so-called "Superfund" sites in the United States. In most of
      these sites, the involvement of the Corporation or its subsidiaries is
      expected to be minimal. The Corporation believes that appropriate reserves
      have been established for its potential liability in connection with all
      Superfund sites but is continuing to review its accruals as additional
      information becomes available. Such reserves take into account all known
      or estimated undiscounted costs associated with these sites, including
      site investigations and feasibility costs, site cleanup and remediation,
      legal costs, and fines and penalties, if any. In addition, environmental
      costs connected with site cleanups on Corporation-owned property also are
      covered by reserves established in accordance with the foregoing. The
      Debtors have been given permission by the Bankruptcy Court to satisfy
      environmental obligations up to $12 million. The Corporation believes that
      neither these matters nor any other known governmental proceedings
      regarding environmental matters will have a material adverse effect upon
      its financial position, cash flows or results of operations.

                                      -37-


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

OVERVIEW

USG Corporation (the "Corporation") and 10 of its United States subsidiaries
(collectively, the "Debtors") are currently operating under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"), an action taken to
resolve asbestos claims in a fair and equitable manner, to protect the long-term
value of the Debtors' businesses, and to maintain the Debtors' leadership
positions in their markets. To properly understand the Corporation and its
businesses, investors, creditors or other readers of this report should first
understand the nature of this voluntary reorganization process under chapter 11
and the potential impacts the reorganization may have on their rights and
interests in the Corporation as described in more detail below. At this point,
there is great uncertainty as to the amount of the Debtors' asbestos-related
liability and thus the value of any recovery for pre-petition creditors or
stockholders under any final plan of reorganization. No plan of reorganization
has thus far been proposed.

The Corporation had $1,076 million of cash, cash equivalents, restricted cash
and marketable securities as of September 30, 2004, and management believes that
this liquidity plus expected operating cash flows will meet the Corporation's
cash needs, including making regular capital investments to maintain and enhance
its businesses throughout the chapter 11 proceedings.

Net sales for the third quarter of 2004 were a record level for any quarter in
the Corporation's history, surpassing the previous record set in the second
quarter of this year. Third quarter 2004 net sales represented a 22% increase
over the same period in 2003. Demand for products sold by the Corporation's
North American Gypsum and Building Products Distribution operating segments was
strong in the third quarter 2004 due to strength in the new housing and repair
and remodel markets. Shipments of gypsum wallboard were at record levels for the
Corporation and the industry in the third quarter and are expected to continue
at relatively high levels through the remainder of 2004. The strong level of
activity in the aforementioned markets and industry utilization rates in excess
of 90% in the third quarter have resulted in a rise of market selling prices for
gypsum wallboard. U.S. Gypsum's nationwide average realized selling price for
SHEETROCK(R) brand gypsum wallboard was up 26% versus the third quarter of 2003.
The Corporation's Worldwide Ceilings operating segment also reported increased
third quarter sales as compared with the same period in 2003 primarily due to
higher selling prices for ceiling grid and tile in 2004. Higher selling prices
on ceiling grid continued into the third quarter despite a drop in demand. These
trends followed a surge in customer purchases of grid during the first half of
the year in anticipation of reduced supply and higher grid prices associated
with a global shortage of steel and the related rise in the cost of steel.

The Corporation's gross margin was 19.9% in the third quarter of 2004, up from
15.3% in the third quarter of 2003. Gross margin improved as a result of
increased shipments and higher selling prices for most major product lines.
However, high

                                      -38-


levels of costs related to natural gas (a major source of energy for the
Corporation), employee benefits (pension and medical insurance for active
employees and retirees), information technology initiatives, wastepaper used in
the manufacture of gypsum wallboard and steel used in the manufacture of ceiling
grid continued to put pressure on profit margins.

VOLUNTARY REORGANIZATION UNDER CHAPTER 11

On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions
for reorganization (the "Filing") under the Bankruptcy Code. These bankruptcy
cases (the "Chapter 11 Cases") are pending in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors intend to
address their liability for all present and future asbestos claims, as well as
all other pre-petition claims, in a plan or plans of reorganization approved by
the Bankruptcy Court. The Debtors currently have the exclusive right to file a
plan of reorganization until December 1, 2004. The Debtors may seek one or more
additional extensions of the exclusivity period depending upon developments in
the Chapter 11 Cases.

A key factor in determining the recovery of pre-petition creditors or
stockholders under any plan of reorganization is the amount that must be
provided in the plan to resolve the Debtors' liability for present and future
asbestos claims. At this time, there is substantial uncertainty as to the amount
that will be required to resolve these asbestos claims and thus whether or to
what extent there will be any recovery for pre-petition creditors or
stockholders under any plan of reorganization.

Our Annual Report on Form 10-K, filed February 24, 2004, discusses the
background and principal impacts of the Filing as well as potential federal
legislation regarding asbestos personal injury claims. During 2004, there have
been developments regarding potential federal legislation. On April 7, 2004, the
Fairness in Asbestos Injury Resolution Act of 2004 (Senate Bill 2290, the "FAIR
Bill") was introduced in the United States Senate. The FAIR Bill has not been
approved by the Senate, has not been introduced in the House of Representatives,
and is not law.

The FAIR Bill introduced in the Senate is intended to establish a nationally
administered trust fund to compensate asbestos personal injury claimants. In the
FAIR Bill's current form, companies that have made past payments for asbestos
personal injury claims would be required to contribute amounts to a national
trust fund on a periodic basis that would pay the claims of qualifying asbestos
personal injury claimants. The nationally administered trust fund would be the
exclusive remedy for asbestos personal injury claims, and such claims could not
be brought in state or federal court as long as such claims are being
compensated under the national trust fund.

In the FAIR Bill's current form, the amounts to be paid to the national fund are
based on an allocation methodology set forth in the FAIR Bill. The amounts that

                                      -39-


participants, including the Debtors, would be required to pay are not
dischargeable in a bankruptcy proceeding. The FAIR Bill also provides, among
other things, that the national trust fund shall cease paying new claims if it
is determined that the money in the trust fund is not sufficient to compensate
eligible claimants. In such a case, under the terms of the current FAIR Bill,
the claimants and defendants would return to the federal court system to resolve
claims not paid by the national trust fund.

Enactment of the FAIR Bill or similar legislation addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtor's asbestos personal injury liability
and Debtors' Chapter 11 Cases.

The outcome of the legislative process, however, is inherently speculative, and
it cannot be known whether the FAIR Bill or similar legislation will ever be
enacted or, even if enacted, what the terms of the final legislation might be.
Many labor organizations, including the AFL-CIO, as well as some Senators, have
indicated that they oppose the FAIR Bill as introduced because, among other
things, they believe that the FAIR Bill does not provide sufficient compensation
to asbestos claimants. On April 22, 2004, the Senate defeated a motion to
proceed with floor consideration of the FAIR Bill. Discussions continue
regarding possible revisions to the FAIR Bill that would allow it to move
forward, but it is unclear whether these discussions will produce agreements on
key issues. It is likely that even if the FAIR Bill is enacted, the terms of the
enacted legislation will be different from the current FAIR Bill, and those
differences may be material to the FAIR Bill's impact on the Corporation.

During the legislative process, proceedings in the Debtors' Chapter 11 Cases
have continued. On May 17, 2004, the Third Circuit Court of Appeals ordered that
Judge Alfred M. Wolin be removed from presiding over the Debtors' Chapter 11
Cases, and on September 27, 2004, the Debtors' Chapter 11 Cases were assigned to
Judge Joy Flowers Conti, a district court judge from the United States District
Court for the Western District of Pennsylvania.

In the third quarter of 2004, pursuant to an order of Judge Fitzgerald, the
bankruptcy judge presiding over the Debtors' Chapter 11 Cases, the parties,
including the committees, engaged in non-binding mediation relating to the
Debtors' asbestos personal injury liability and the potential terms of a plan of
reorganization. The mediation was conducted before David Geronemus, who was
appointed mediator by Judge Fitzgerald. The mediation has not resulted in an
agreement regarding the Debtors' asbestos liability or the terms of a plan of
reorganization.

Prior to the mediation, the Debtors were informed by the mediator that the legal
representative for future asbestos claimants has raised the issue of whether USG
Corporation and its subsidiaries may be liable for asbestos personal injury
claims arising from the sale of asbestos-containing products by A.P. Green
Refractories Co. ("A.P. Green") before 1967. A.P. Green, which manufactured and
sold products

                                      -40-


used in refractories, was acquired by merger into U.S. Gypsum in 1967 and
thereafter operated as a wholly-owned subsidiary of U.S. Gypsum until 1985, at
which time A.P. Green became a wholly-owned subsidiary of USG Corporation. In
1988, A.P. Green became a publicly-traded company when its shares were
distributed to the stockholders of USG Corporation. In February 2002, A.P. Green
(now known as A.P. Green Industries, Inc.), as well as its parent company,
Global Industrial Technologies, Inc., and other affiliates, filed voluntary
petitions for reorganization through which A.P. Green and its affiliates seek to
resolve their asbestos-related liabilities. The A.P. Green reorganization
proceeding is pending in the United States Bankruptcy Court for the Western
District of Pennsylvania and is captioned In re: Global Industrial Technologies,
Inc. (Case No. 02-21626). The disclosure statement filed in July 2003 by the
debtors in the A.P. Green reorganization proceedings states that there are
235,757 asbestos personal injury claims pending against A.P. Green as well as
about 59,000 such claims pending against an A.P. Green affiliate. The disclosure
statements also states that A.P. Green has approximately $492 million in unpaid
prepetition settlements and judgments relating to asbestos personal injury
claims. The disclosure statement does not provide an estimate of the cost of
resolving A.P. Green's liability for pending or future asbestos claims.

The Corporation does not have sufficient information to predict whether or how
any plan of reorganization in the Debtors' Chapter 11 Cases might address any
asbestos-related liability based on sales of asbestos-containing products by
A.P. Green. The Corporation also does not have sufficient information to
estimate the amount, or range of amounts, of A.P. Green's asbestos liabilities.
If U.S. Gypsum is determined to be liable for the sale of asbestos-containing
products by A.P. Green, this result likely would materially increase the amount
of U.S. Gypsum's present and future asbestos liabilities and could materially
and adversely affect the recovery of the Debtors' pre-petition creditors and
holders of the Corporation's equity.

The legal representative for future asbestos claimants and the Official
Committee of Asbestos Personal Injury Claimants have also raised the issue of
whether the assets and liabilities of all Debtors should be temporarily
consolidated for purposes of the treatment of claims under a plan of
reorganization. Under this theory, which is sometimes called "substantive
consolidation," the liabilities of all Debtors subject to this consolidation,
including liabilities based on sales of asbestos-containing products by U.S.
Gypsum, would be paid from the pooled assets of U.S. Gypsum and all other
Debtors subject to consolidation. If applied, substantive consolidation could
materially and adversely affect the recovery rights of creditors of Debtors
other than U.S. Gypsum and the holders of the Corporation's equity.

See Item 1, Note 13. Litigation, for additional information on the background of
asbestos litigation, developments in the Corporation's reorganization
proceedings, and estimated cost.

                                      -41-


ACCOUNTING IMPACT

The Corporation is required to follow American Institute of Certified Public
Accountants ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." Pursuant to
SOP 90-7, the Corporation's pre-petition liabilities that are subject to
compromise are reported separately on the consolidated balance sheet. Virtually
all of the Corporation's pre-petition debt is currently in default and was
recorded at face value and classified within liabilities subject to compromise.
U.S. Gypsum's asbestos liability also is classified within liabilities subject
to compromise. See Item 1. Note 2. Voluntary Reorganization Under Chapter 11,
which includes information related to financial statement presentation, the
debtor-in-possession statements and detail of liabilities subject to compromise
and chapter 11 reorganization expenses.

CONSOLIDATED RESULTS OF OPERATIONS

NET SALES

Net sales in the third quarter of 2004 totaled $1,175 million, a record for any
quarter in the Corporation's history, surpassing the previous record set in the
second quarter of this year, and a 22% increase from $963 million in the third
quarter of 2003. For the first nine months of 2004, net sales totaled $3,340
million, up 22% from $2,739 million in the comparable 2003 period. Net sales are
up for all three of the Corporation's operating segments in 2004 primarily due
to increased shipments and higher selling prices for most major product lines.
See Core Business Results of Operations below for an explanation of product line
results by segment.

COST OF PRODUCTS SOLD

Cost of products sold in the third quarter of 2004 was $941 million, up 15% from
$816 million a year ago. For the first nine months of 2004, cost of products
sold totaled $2,719 million, up 16% from $2,341 million in the comparable 2003
period. Key factors for these variations were increased product volume and
higher costs related to natural gas (a major source of energy for the
Corporation), employee benefits (pension and medical insurance for active
employees and retirees), information technology initiatives, wastepaper used in
the manufacture of gypsum wallboard and steel used in the manufacture of ceiling
grid.

GROSS PROFIT

Gross profit (net sales less cost of products sold) in the third quarter of 2004
was $234 million, a 59% increase from $147 million in the third quarter of 2003.
For the first nine months of 2004, gross profit totaled $621 million, up 56%
from $398 million in the comparable 2003 period. Gross margin (gross profit as a
percent of net sales) was 19.9% in the third quarter of 2004, up from 15.3% in
the third quarter of 2003. For the first nine months of 2004, gross margin was
18.6%, up from 14.5% in the comparable 2003 period.

                                      -42-


SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses in the third quarter of 2004 were $82
million, up 5% from $78 million in the third quarter of 2003 primarily
reflecting higher employee benefit costs (pension and medical insurance for
active employees and retirees) and higher levels of accruals for incentive
compensation associated with the attainment of profit goals. However, as a
percent of net sales, selling and administrative expenses improved to 7.0% for
the third quarter of 2004 from 8.1% in the third quarter of 2003 due to the
higher level of net sales in 2004. For the first nine months, selling and
administrative expenses were $238 million (7.1% of net sales), versus $239
million (8.7% of net sales) a year ago.

CHAPTER 11 REORGANIZATION EXPENSES

Chapter 11 reorganization expenses in the consolidated and debtor-in-possession
statements of earnings consisted of the following (dollars in millions):



                                               Three Months            Nine Months
                                           ended September 30,     ended September 30,
                                           --------------------    --------------------
                                             2004        2003        2004        2003
                                           --------    --------    --------    --------
                                                                   
Legal and financial advisory fees          $      7    $      4    $     17    $     13
Bankruptcy-related interest income               (3)         (2)         (7)         (6)
                                           --------    --------    --------    --------
Total chapter 11 reorganization expenses          4           2          10           7
                                           ========    ========    ========    ========


OPERATING PROFIT

Operating profit in the third quarter of 2004 was $148 million compared with $67
million in the third quarter of 2003. Operating profit for the first nine months
of 2004 was $373 million compared with $152 million for the first nine months of
2003.

INTEREST EXPENSE

Interest expense of $2 million and $4 million was incurred in the third quarter
and first nine months of 2004, respectively. Interest expense for the respective
2003 periods was $2 million and $5 million. Under SOP 90-7, virtually all of the
Corporation's outstanding debt is classified as liabilities subject to
compromise, and interest expense on this debt has not been accrued or recorded
since the Petition Date. For the third quarter and first nine months of 2004,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $18 million and $53 million, respectively. From the Petition Date
through September 30, 2004, contractual interest expense not accrued or recorded
on pre-petition debt totaled $239 million. Although no post-petition accruals
are required to be made for such contractual interest expense, debtholders may
seek to recover such amounts in the Chapter 11 Cases.

                                      -43-


INTEREST INCOME

Non-bankruptcy related interest income in the third quarter of 2004 was $2
million compared with $1 million in the third quarter of 2003. Non-bankruptcy
related interest income for the first nine months of 2004 was $4 million
compared with $3 million for the first nine months of 2003.

INCOME TAXES

Income tax expense amounted to $58 million and $143 million in the third quarter
and first nine months of 2004, respectively, compared with $27 million and $63
million in the corresponding 2003 periods. The effective tax rates were 38.7%
and 40.8% for the first nine months of 2004 and 2003, respectively. The decrease
in the effective tax rate was primarily due to a reduction in the Corporation's
tax reserves resulting from the application of recently finalized IRS
regulations to the Chapter 11 reorganization expenses incurred by the
Corporation through 2003 and the impact on the effective tax rate of a similar
amount of permanent book-tax differences but a higher amount of pretax earnings
in the first nine months of 2004 versus the prior-year period.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." A
non-cash, after-tax charge of $16 million ($27 million pretax) was reflected on
the consolidated statement of earnings as a cumulative effect of a change in
accounting principle as of January 1, 2003. See Item 1. Note 6. Asset Retirement
Obligations for additional information related to the adoption of SFAS No. 143.

NET EARNINGS

Net earnings of $90 million, or $2.10 per share, were reported for the third
quarter of 2004 compared with $39 million, or $0.89 per share, for the third
quarter of 2003. For the first nine months of 2004, net earnings totaled $227
million, or $5.28 per share, compared with $76 million, or $1.75 per share, for
the first nine months of 2003.

                                      -44-


CORE BUSINESS RESULTS OF OPERATIONS



(dollars in millions)                    THREE MONTHS            NINE MONTHS
                                     ENDED SEPTEMBER 30,     ENDED SEPTEMBER 30,
                                     --------------------    --------------------
NET SALES:                             2004        2003        2004        2003
                                     --------    --------    --------    --------
                                                             
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company                  $    638    $    540    $  1,829    $  1,548
CGC Inc. (gypsum)                          73          69         214         188
Other subsidiaries*                        49          39         129         102
Eliminations                              (52)        (48)       (147)       (130)
                                     --------    --------    --------    --------
 Total                                    708         600       2,025       1,708
                                     --------    --------    --------    --------
WORLDWIDE CEILINGS:
USG Interiors, Inc.                       118         113         373         337
USG International                          50          45         150         127
CGC Inc. (ceilings)                        12          11          40          33
Eliminations                              (12)        (12)        (39)        (39)
                                     --------    --------    --------    --------
Total                                     168         157         524         458
                                     --------    --------    --------    --------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation                    470         341       1,286         961
                                     --------    --------    --------    --------
Eliminations                             (171)       (135)       (495)       (388)
                                     --------    --------    --------    --------
Total USG Corporation                   1,175         963       3,340       2,739
                                     ========    ========    ========    ========
OPERATING PROFIT:
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company                       103          43         251         109
CGC Inc. (gypsum)                          12          11          34          23
Other subsidiaries*                        10           6          23          13
                                     --------    --------    --------    --------
Total                                     125          60         308         145
                                     --------    --------    --------    --------
WORLDWIDE CEILINGS:
USG Interiors, Inc.                         9          10          40          23
USG International                           4           -           9           2
CGC Inc. (ceilings)                         1           2           6           4
                                     --------    --------    --------    --------
Total                                      14          12          55          29
                                     --------    --------    --------    --------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation                     31          17          76          41
                                     --------    --------    --------    --------
Corporate                                 (20)        (20)        (56)        (56)
Chapter 11 reorganization expenses         (4)         (2)        (10)         (7)
Eliminations                                2           -           -           -
                                     --------    --------    --------    --------
Total USG Corporation                     148          67         373         152
                                     ========    ========    ========    ========


*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.

                                      -45-


NORTH AMERICAN GYPSUM

Net sales of $708 million increased 18% from the third quarter of 2003, while
operating profit more than doubled to $125 million. First nine months net sales
of $2,025 million reflected an increase of 19% from a year ago, while operating
profit of $308 million increased 112%.

For the third quarter of 2004, net sales for U.S. Gypsum increased $98 million,
or 18%, compared with the third quarter of 2003, while operating profit rose $60
million, or 140%. These increases primarily reflected increased selling prices
for SHEETROCK(R) brand gypsum wallboard and record shipments of gypsum wallboard
and complementary building products.

U.S. Gypsum's nationwide average realized selling price for SHEETROCK(R) brand
gypsum wallboard was $128.65 per thousand square feet in the third quarter of
2004. This price was up 26% from $101.83 in the third quarter of 2003 and up 9%
from $118.47 in the second quarter of 2004.

Demand for U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard continued to be
very strong as shipments were at a record level for any third quarter in the
company's history. U.S. Gypsum sold 2.73 billion square feet of gypsum wallboard
during the third quarter of 2004, a slight increase from 2.70 billion square
feet sold in the comparable 2003 period. U.S. Gypsum's wallboard plants operated
at 93% of capacity in the third quarter of 2004 compared with 94% in the third
quarter of 2003. Industry shipments of gypsum wallboard were up approximately 4%
from the third quarter of 2003. Shipments are expected to remain at relatively
high levels through the remainder of 2004.

The improved pricing and record shipments discussed above as well as the
implementation of various cost-saving initiatives and improved production
efficiencies at the company's gypsum wallboard plants more than offset the
unfavorable effects of higher costs for wastepaper (a raw material used to
produce the facing and backing of gypsum wallboard) and natural gas (a major
source of energy for the company). Prices paid for wastepaper in the third
quarter of 2004 were up over 30% from the third quarter of 2003.

U.S. Gypsum continued to grow its complementary building products business.
Shipments of DUROCK(R) brand cement board and FIBEROCK(R) brand gypsum fiber
panels were the highest for any quarter in the company's history. Shipments of
SHEETROCK(R) brand joint treatment products were the highest for any third
quarter in U.S. Gypsum's history. In September, the company announced the
start-up of a new state-of-the-art joint treatment manufacturing line at the
company's Gypsum, Ohio, plant.

Net sales for the gypsum business of Canada-based CGC Inc. increased $4 million
or 6% and operating profit rose $1 million, or 9%, as compared with the third
quarter of 2003. These results were primarily attributable to the favorable
effects of currency translation, which, in the case of operating profit, was
partially offset by higher manufacturing costs for gypsum wallboard.

                                      -46-


WORLDWIDE CEILINGS

Third quarter 2004 net sales of $168 million increased 7%, while operating
profit of $14 million increased 17%, as compared with the third quarter of 2003.
For the first nine months of 2004, net sales of $524 million were up 14%, while
operating profit increased to $55 million from $29 million a year ago.

USG Interiors, Inc., the Corporation's domestic ceilings business, reported a $5
million, or 4%, increase in net sales compared with the third quarter of 2003,
primarily due to higher selling prices for ceiling grid and tile in 2004.
However, operating profit for the company declined $1 million primarily due to
higher energy and steel costs, combined with lower shipments of ceiling grid.
Third quarter ceiling grid shipments were lower following a surge in customer
purchases of grid during the first half of the year in anticipation of reduced
supply and higher grid prices associated with the global shortage of steel. The
Corporation expects that the cost of steel will continue to rise further during
the fourth quarter but at a lesser rate than for the first nine months of the
year.

USG International's third quarter 2004 net sales improved 11% and operating
profit rose to $4 million from breakeven results in the third quarter of 2003
primarily due to increased demand for ceiling grid in Europe and the favorable
effects of currency translation. In addition, third quarter 2003 breakeven
results included a $1 million writedown related to a closed ceiling tile plant
in Aubange, Belgium.

The ceilings business of CGC Inc. reported a $1 million increase in net sales
and a $1 million decrease in operating profit for the third quarter of 2004.

BUILDING PRODUCTS DISTRIBUTION

L&W Supply Corporation ("L&W Supply"), the leading specialty building products
distribution business in the United States, reported third quarter net sales of
$470 million and operating profit of $31 million, representing increases of 38%
and 82% respectively, from the third quarter of 2003. For the first nine months
of 2004, net sales of $1,286 million and operating profit of $76 million
increased 34% and 85%, respectively, versus the first nine months of 2003.

These increases primarily reflected record shipments of gypsum wallboard and
complementary building products, such as drywall metal, ceiling products, joint
compound and roofing. Third quarter 2004 shipments of L&W Supply's gypsum
wallboard were up 10% versus the same prior-year period, while sales of
complementary building products rose 43%.

L&W Supply operated 184 locations in the United States as of September 30, 2004,
compared with 185 locations as of September 30, 2003.

                                      -47-


MARKET CONDITIONS AND BUSINESS OUTLOOK

The gypsum industry experienced a record level of wallboard shipments in the
third quarter of 2004 attributable to continued strength in the new housing and
the residential remodeling markets. The robust level of activity in these
markets, which together account for nearly two-thirds of all demand for gypsum
wallboard, and utilization rates in excess of 90% for the industry, have
resulted in a rise of market selling prices for gypsum wallboard.

The outlook for the fourth quarter remains favorable. The strength of the
residential market is expected to continue, although the exceptional strength of
the first nine months of the year may abate somewhat in the fourth quarter.
Increasing mortgage rates may affect the level of demand in both the new housing
and residential remodeling markets. The commercial construction market, the
principal market for the Corporation's ceilings products, is showing signs of
improvement, but office vacancy rates remain at very high levels. In addition,
the Corporation, like many other companies, faces many ongoing cost pressures
such as higher prices for natural gas and raw materials and increased employee
benefits.

The Corporation continues to focus its management attention and investments on
improving customer service, manufacturing costs and operating efficiencies, as
well as selectively investing to grow its businesses. In addition, the
Corporation will diligently continue its attempt to resolve the chapter 11
proceedings, consistent with the goal of achieving a fair, comprehensive and
final resolution to its asbestos liability.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

As of September 30, 2004, the Corporation had $1,076 million of cash, cash
equivalents, restricted cash and marketable securities, of which $256 million of
cash and cash equivalents was held by non-Debtor subsidiaries. The total amount
of $1,076 million was up $129 million, or 14%, from $947 million as of December
31, 2003. Since the Petition Date, the Corporation's level of liquidity has
increased due to strong operating cash flows and the absence of cash payments
related to asbestos settlements and principal and interest on pre-petition debt.
Contractual interest expense not accrued or recorded on pre-petition debt was
$53 million in the first nine months of 2004 and $239 million since the Petition
Date.

CASH FLOWS

As shown on the consolidated statement of cash flows, cash and cash equivalents
decreased $31 million during the first nine months of 2004. The primary source
of cash in the first nine months of 2004 was earnings from operations. Primary
uses of cash were: (i) working capital of $141 million (largely customer
rebates, employee incentive compensation and other seasonal needs), (ii) net
purchases of marketable securities of $151 million, (iii) capital spending of
$80 million, (iv) the designation of $13 million as restricted cash representing
cash collateral

                                      -48-


primarily to support outstanding letters of credit issued mainly for purchases
of steel from foreign suppliers and (v) the use of $4 million for an
acquisition.

Net cash from operating activities was $211 million during the first nine months
of 2004 compared with $136 million from operating activities during the same
period in 2003. This variation was primarily attributable to the increase in
2004 earnings from operations. Net cash used for investing activities increased
to $229 million from $119 million primarily due to higher net purchases of
marketable securities in 2004. Net cash used for financing activities of $13
million (the designation of restricted cash as described above) during the first
nine months of 2004 represented a $7 million increase versus the first nine
months of 2003.

WORKING CAPITAL

Total working capital (current assets less current liabilities) as of September
30, 2004, amounted to $1,285 million, and the ratio of current assets to current
liabilities was 3.66-to-1. As of December 31, 2003, working capital amounted to
$1,084 million, and the ratio of current assets to current liabilities was
3.62-to-1.

Receivables increased to $453 million as of September 30, 2004, from $321
million as of December 31, 2003, largely reflecting a 28% increase in net sales
for the month of September 2004 as compared with December 2003. Inventories and
payables also were up from December 31, 2003, primarily due to the increased
level of business. Inventories increased to $364 million from $280 million, and
accounts payable increased to $248 million from $202 million. Accrued expenses
increased slightly to $211 million from $206 million as of December 31, 2003.

MARKETABLE SECURITIES

As of September 30, 2004, $387 million was invested in marketable securities, up
$147 million from $240 million as of December 31, 2003. Of the September 30,
2004 amount, $258 million was invested in long-term marketable securities and
$129 million in short-term marketable securities. The Corporation's marketable
securities are classified as available-for-sale securities and reported at fair
market value with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss) on the consolidated
balance sheet.

CAPITAL EXPENDITURES

Capital spending amounted to $80 million in the first nine months of 2004,
compared with $61 million in 2003. As of September 30, 2004, remaining capital
expenditure commitments for the replacement, modernization and expansion of
operations amounted to $275 million, compared with $95 million as of December
31, 2003.

During the bankruptcy proceedings, the Corporation expects to have limited
ability to access capital other than its own cash, marketable securities and
future cash flows to fund potential future growth opportunities such as new
products, acquisitions and joint ventures. Nonetheless, the Corporation expects
to be able to pursue a program of capital spending aimed at maintaining and
enhancing its businesses.

                                      -49-


RESTRICTED CASH AND LETTERS OF CREDIT

The Corporation has a $100 million credit agreement, which expires April 30,
2006, with LaSalle Bank N.A. (the "LaSalle Facility") to be used exclusively to
support the issuance of letters of credit needed to support business operations.
As of September 30, 2004, $12 million of letters of credit, which are cash
collateralized at 103%, were outstanding.

The Corporation has posted additional cash collateral in the amount of $8
million to support outstanding letters of credit and a bank guarantee issued by
Commerzbank in Germany.

As of September 30, 2004, a total of $20 million was reported as restricted cash
on the consolidated balance sheet.

DEBT

As of September 30, 2004, total debt amounted to $1,007 million, of which $1,005
million was included in liabilities subject to compromise. These amounts were
unchanged from the December 31, 2003, levels and do not include any accruals for
post-petition contractual interest expense.

EXIT ACTIVITIES

In the fourth quarter of 2003, the Corporation recorded a charge of $3 million
pretax ($2 million after-tax) for severance related to a salaried workforce
reduction of approximately 70 employees. An additional 56 open positions were
eliminated. Payments totaling $1 million were made in the fourth quarter of
2003, and a reserve of $2 million was included in accrued expenses on the
consolidated balance sheet as of December 31, 2003. The remaining payments of $2
million were made in the first quarter of 2004.

LEGAL CONTINGENCIES

As a result of the Filing, all pending asbestos lawsuits against the Debtors are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. See Item 1. Note
13. Litigation for additional information on the background of asbestos
litigation, developments in the Corporation's reorganization proceedings and
estimated cost.

The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceedings regarding environmental matters
will have a material adverse effect upon its financial position, cash flows or
results of operations. See Item 1. Note 13. Litigation for additional
information on environmental litigation.

                                      -50-


CRITICAL ACCOUNTING POLICIES

The preparation of the Corporation's financial statements requires management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses during the periods presented. The
Corporation's 2003 Annual Report on Form 10-K, which was filed on February 24,
2004, includes a summary of the critical accounting policies the Corporation
believes are the most important to aid in understanding its financial results.
There have been no material changes to these critical accounting policies that
impacted the Corporation's reported amounts of assets, liabilities, revenues or
expenses during the first nine months of 2004.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Filing and the conduct,
outcome and costs of the Chapter 11 Cases, as well as the ultimate costs
associated with the Corporation's asbestos litigation, including the possible
impact of any asbestos-related legislation, may differ from management's
expectations. Actual business or other conditions may also differ from
management's expectations and accordingly affect the Corporation's sales and
profitability or other results. Actual results may differ due to various other
factors, including economic conditions such as the levels of construction
activity, employment levels, interest rates, currency exchange rates and
consumer confidence; competitive conditions such as price and product
competition; shortages in raw materials; increases in raw materials and energy
costs; and the unpredictable effects of acts of terrorism or war upon domestic
and international economies and financial markets. The Corporation assumes no
obligation to update any forward-looking information contained in this report.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), have concluded that, as of the end of the fiscal quarter covered by this
report on Form 10-Q, the Corporation's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Corporation and its consolidated subsidiaries would be made known to them by
others within those entities.

(b) Changes in internal control over financial reporting.

 There was no change in the Corporation's "internal control over financial

                                      -51-


reporting" (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934)
identified in connection with the evaluation required by Rule 13a-15(d) of the
Securities Exchange Act of 1934 that occurred during the fiscal quarter covered
by this report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.

                                      -52-


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of USG Corporation:

We have reviewed the accompanying consolidated balance sheets of USG Corporation
and subsidiaries as of September 30, 2004 and the related consolidated
statements of earnings for the three month and nine month periods ended
September 30, 2004 and 2003 and the consolidated statements of cash flows for
the nine month periods ended September 30, 2004 and 2003. These interim
financial statements are the responsibility of the Corporation's management.

We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
USG Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the two years then ended (not presented herein); and in our
report dated February 10, 2004 we expressed an unqualified opinion on those
consolidated financial statements and included explanatory paragraphs concerning
(i) matters which raise substantial doubt about the Corporation's ability to
continue as a going concern; (ii) changes in methods of accounting for asset
retirement obligations and goodwill and other intangible assets due to the
Corporation's adoption of Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations" in 2003, and SFAS No. 142,
"Goodwill and Other Intangible Assets" in 2002; and (iii) the application of
procedures relating to certain disclosures of financial statement amounts
related to the 2001 financial statements that were audited by other auditors who
have ceased operations and for which we have expressed no opinion or other form
of assurance other than with respect to such disclosures. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2003 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.

                                      -53-


As discussed in Note 2 to the consolidated financial statements, USG Corporation
and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy protection
on June 25, 2001. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Corporation; or (d) as to operations,
the effect of any changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 13 to the consolidated financial statements, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation,
which, among other things, may lead to possible changes in the composition of
the Corporation's business portfolio, as well as changes in the ownership of the
Corporation. This uncertainty raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Notes 2 and 13 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP

Chicago, Illinois
October 26, 2004

                                      -54-


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1. Note 13. Litigation for information concerning the asbestos
and related bankruptcy litigation and environmental litigation.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



                                                               (c) Total Number of       (c) Maximum Number (or
                                                                Shares (or Units)     Approximate Dollar Value)
                   (a) Total Number of    (b) Average Price    Purchased as Part of      of Shares (or Units)
 2004              of Shares (or Units)   Paid per Share (or    Publicly Announced     that May Yet Be Purchased
Period                  Purchased                 Unit)         Plans or Programs     Under the Plans or Programs
- -----------------  --------------------   ------------------   --------------------   ---------------------------
                                                                          
July                      1,124                  17.73                  -                          -
August                    1,763                  17.42                  -                          -
September                     -                      -                  -                          -
                          -----                  -----              -----                     ------

Total 3rd Quarter         2,887                  17.58                  -                          -
                          =====                  =====              =====                     ======


(a)   Reflects shares reacquired to provide for tax withholdings on shares
      issued to employees under the terms of the USG Corporation 1995 Long-Term
      Equity Plan, 1997 Management Incentive Plan or 2000 Omnibus Management
      Incentive Plan.

(b)   The price per share is based upon the mean of the high and the low prices
      for a USG Corporation common share on the NYSE on the date of the tax
      withholding transaction.

(c)   The Corporation currently does not have in place a share repurchase plan
      or program.

ITEM 6. EXHIBITS

10.1  Third Amendment to Omnibus Management Incentive Plan of USG Corporation

10.2  Key Employee Retention Plan (July 1, 2004 - December 31, 2005), dated July
      1, 2004 (incorporated by reference to Exhibit 10 of USG Corporation's Form
      10-Q, dated July 30, 2004.

15.   Letter from Deloitte & Touche LLP regarding unaudited financial
      information.

31.1  Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive
      Officer

31.2  Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial
      Officer

32.1  Section 1350 Certifications of USG Corporation's Chief Executive Officer

32.2  Section 1350 Certifications of USG Corporation's Chief Financial Officer

                                      -55-


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       USG CORPORATION

                                       By /s/ William C. Foote
                                          ------------------------------------
                                          William C. Foote,
                                          Chairman, Chief Executive Officer
                                          and President

                                       By /s/ Richard H. Fleming
                                          ------------------------------------
                                          Richard H. Fleming,
                                          Executive Vice President and
                                          Chief Financial Officer

                                       By /s/ D. Rick Lowes
                                          ------------------------------------
                                          D. Rick Lowes,
                                          Vice President and
                                          Controller

November 1, 2004

                                      -56-